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 -
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.
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 -
|Company Name||ICICI Flexicap Fund||ICICI Multicap Fund|
|Holding %||Holding %|
|Avenue Supermarts Ltd.||0.42||3.18|
|Axis Bank Ltd.||1.18||1.39|
|Bajaj Electricals Ltd.||0.80||1.87|
|Bharti Airtel Ltd.||3.63||1.79|
|Britannia Industries Ltd.||2.24||0.47|
|City Union Bank Ltd.||0.21||2.05|
|HCL Technologies Ltd.||1.26||1.41|
|HDFC Bank Ltd.||5.55||5.32|
|ICICI Bank Ltd.||5.59||7.73|
|Larsen & Toubro Ltd.||1.18||1.12|
|Max Financial Services Ltd.||0.47||1.64|
|Motherson Sumi Systems Ltd.||1.44||2.30|
|Orient Electric Ltd.||0.23||1.87|
|State Bank Of India||1.14||2.50|
|Tata Steel Ltd.||2.00||2.16|
|TVS Motor Company Ltd.||1.42||3.31|
The movement in their NAVs from 19th July 2021 to 18th Jan 2022 (6 months) was as follows -
|ICICI Flexicap Fund(NFO)||ICICI Multicap Fund(Old Fund)|
|NAV as on 19th July 2021||10.00||417.35|
|NAV as on 18th Jan 2022||11.03||460.75|
|NAV increase in Rs.||1.03||43.40|
|NAV increase in %||10.30%||10.40%|
From the above example, we observe that -
#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) -
|Particulars||ICICI Flexicap Fund||ICICI Multicap Fund|
|NAV on 19th July 2021||10||417.35|
|NAV on 18th January 2022||11.03||460.75|
|Fund Value on 18th January 2022(no. of units X NAV)||1,10,300||1,10,395|
|Rate of Return||10.30%||10.40%|
From the above example, one can observe that:
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!
Research Analyst, InvestGuru
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