While buying MF, does NAV matter?
Should one take into consideration NAV value while investing in Mutual funds?
I personaly go and invest in funds having low NAV (but not poor performance) since the returns would be more as I would be getting more units if the NAV is low.
Can anybody tell me whether my approach is right?
As per my understanding the MF - NAV does not matter & should be the least of all concerns while investing in a mutual fund. Here's some of my reasons -
Just think - What is it that makes the NAV of a mutual fund fluctuate daily. Is it the past value of the NAV? No.
You need to understand one thing very clearly that a Mutual Fund's PORTFOLIO decides the returns, not the low NAV/High NAV or past/last NAV.
If the MF portfolio is good, you will automatically see the NAV appreciation. If a portfolio is bad, your NAV will go nowhere, irrespective of whether it is "High" or "Low".
Now just think in percentage terms -
Let's assume that you are looking at two funds. Further assume that both the funds have only one stock in their portfolio.
The NAV for Fund 'A' & Fund 'B' in our expample is, say, 100 & 1000. Now, you want to decide in which of the 2 funds to invest in. Your thinking goes this way."I have Rs.10000 to invest. If I buy Fund A, I would get 1000 units but if I buy Fund B, I would get only 100 units. Surely, I am better off investing in Fund 'A' because I get more units." Let's see what happens the next day.
The lone stock in both the funds appreciates by, say 10%. What happens to the NAVs? Fund A's NAV will now be Rs.110.0 while that of Fund B will be Rs.1100!
How much has your investment appreciated in one day? In both cases, it is exactly 10%, no more no less. It would have made no difference if you had invested in Fund A or Fund B!
Hope you got the idea! So, just look at a funds performance & portfolio rather than the NAV if you want to invest in the Growth Option.
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I am speaking from experience and my own personal views above - I am not an advisor, nor an expert.
If you decide to invest in a mutual fund for the Dividend then you are better off investing in one that has a Low NAV. Here's why -
The Returns that you make as an investor come out of 2 things. (1) Capital Appreciation & (2) Dividend Yield
(1) Was seen earlier so here we'l focus on (2).
Suppose our Fund 1 & Fund 2 from the previous example have the following NAVs respectively. Rs.10 & Rs.100 (again!) The 10 & 100 are current NAV & should not be confised with the Face Values (which in most cases is Rs.10. We will assume the same here)
Now, both funds declare a Dividend of 50% (or, Rs.5 on a Face Value per unit of Rs.10)
For the moment we will assume that both funds have no Entry Loads. You invest in the same Rs.1000 in both. What happens to the Dividend Yield in the 2 cases?
In case of Fund 1, your Dividend Yield is 50%. How? Rs.5 (the dividend) divided by the Entry NAV (Rs.10) expressed as a percentage.
In case of Fund 2, your Dividend Yield is a paltry 5%. How? Rs.5 (dividend) divided by the Entry NAV (Rs.100) expressed as a percentage!!!!
So, although in both cases the Capital Appreciation is the same (10%), the Dividend Yields are vastly different, thereby putting an investor who opts for the Dividend Option at a disadvantage, if he chooses the Higher NAV fund.
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