Do Mutual Funds With Lower NAVs Give Better Returns?

Quite often investors enquire about NAV of funds before they make an investment decision. Their preference is for a mutual fund with lower NAV in comparison to a higher NAV fund. Some of them are keen to invest in NFOs, which get launched at Rs.10 NAV. When we enquire about their choice for lower NAV funds, we often hear the following reasons -

1. Lower NAV will grow much faster and will have higher rate of return, whereas a higher NAV will take more time to grow and will have lower return.
2. A lower NAV will get more units of a fund than a higher NAV fund

Let’s analyse these two views with real examples -

#1 Lower NAV will grow faster while a higher NAV will take more time to grow

The NAV of a fund increases/ decreases on the basis of gain/ loss in the underlying investments in its portfolio. When an NFO is launched, it is available at Rs.10 NAV. The amount collected by the fund is invested in same market/stocks/securities where other mutual funds are already investing the existing money of investors. If the two funds, one NFO (or any other lower NAV fund) and one existing old fund (with high NAV), tend to invest in similar stocks/securities, their rate of return in percentage terms shall be very similar though the NAV movement may be visibly very different in a given period.

Example

ICICI Prudential Flexicap Fund was launched on 19th July 2021 with NAV of Rs. 10. A similar type scheme, ICICI Prudential Multicap fund, was already existing in the market since 1st October 1994. The NAV of ICICI Multicap Fund on 19th July 2021 was Rs. 417.35. As we can see, the new scheme had very low NAV as compared to a 27 year old fund.

The portfolio of both schemes had very similar stocks -

The movement in their NAVs from 19th July 2021 to 18th Jan 2022 (6 months) was as follows -

From the above example, we observe that -

1. Both the schemes had very similar looking portfolio. It highlights our earlier point that NFOs tend to invest in similar market/securities where existing funds are already investing. There is nothing very new or different with most of the NFOs.
2. NAV of ICICI Flexi Cap increased from Rs. 10 to Rs. 11.03, a gain of Rs. 1.03 and a return of 10.30%. In the same period, the NAV of ICICI Multicap Fund increased from Rs. 417.35 to Rs. 460.75, a gain of Rs.43.40 and a return of 10.40%.
3. The returns in both the funds are similar in percentage terms, though the actual NAVs of both funds changed very differently. A lower NAV fund moved by lower value (Rs. 1.03), whereas a higher NAV fund moved by a higher value (43.40).
4. The performance of a fund depends upon its investment portfolio and not on its NAV. Similar type funds with similar type of portfolio shall provide similar kind of returns, irrespective of their NAV.

#2 A lower NAV will get more units of a fund than a higher NAV fund

Since units of a fund are allotted on the basis of its NAV, an investor gets more units in a lower NAV fund than a higher NAV fund. However, as seen in the above example, the performance of the fund depends upon its investment portfolio and not on its NAV.

Assuming an investment of 1 Lac was made in the above two funds on 19th July 2021, let’s check its performance till 18th January 2022 (6 months) -

From the above example, one can observe that:

1. A lower NAV fund allots more units to the investor in comparison to a higher NAV fund.
2. As the growth rate of both the funds is almost similar, the NAVs move similarly in percentage terms, but differently in value terms.
3. As units are re-multiplied to the final NAV of the fund, the fund value growth becomes similar to the NAV growth rate in percentage terms.

Conclusion:

A fund’s NAV is the rate at which units are allocated to an investor. A fund may have a lower NAV either because it is new in the market or because of poor performance. The growth of any mutual fund depends upon the growth of the category it belongs to, growth of the overall market and the quality of the fund management. The NAV of the fund has absolutely no role to play in the overall performance of the fund. One situation where investors should be cautious is when a fund’s NAV is high and its fund size is also high within its category.

So, go ahead. Prepare your financial plan and make your dream come true by investing in well managed funds, without worrying about their NAVs.

We wish you Happy Investing!

Taneesha Bansal
Research Analyst, InvestGuru