Buying mutual funds at lower NAV vs higher NAV

Net Asset Value or NAV Net Asset Value or NAVLet’s assume that you are out looking for a new refrigerator. The model you want to purchase is priced at Rs. 30,000 in one store and Rs. 29,000 in another. What would you select? Definitely, the store where it is available for Rs. 29,000.How about a mutual fund scheme with a NAV (Net Asset Value) of Rs. 100 and another fund from the same category with an identical portfolio with a NAV of Rs. 20? You’d mostly be inclined towards the one available at Rs. 20, right?While it sure makes sense to look for the cheapest possible option when you want to purchase something like a refrigerator, the same concept does not apply to mutual funds. Take a look-

In simple words, the Net Asset Value or NAV is the mutual fund scheme's total value minus the liabilities for every outstanding unit. In no way is the NAV related to the potential of the scheme.It is wrong to assume that a scheme with a NAV of Rs. 20 is cheaper than a scheme available at Rs. 100 per unit. If both the schemes have a similar portfolio, the growth will be more or less the same.So, if the scheme of NAV Rs. 100 delivers 10% returns in a year, the other scheme with a similar portfolio but NAV of Rs. 20 will not deliver 15% or 20% returns. It’d be the same as the scheme with Rs. 100 NAV.

If two schemes have a similar portfolio composition, why do they have different NAVs?Higher NAV generally suggests that the scheme has prospered well in the past or has been around for a long time. For instance, NFOs (New Fund Offers) are generally launched at Rs. 10 per unit. Let us assume that an equity NFO with 20 companies in its portfolio is launched at Rs. 10 in 2021.Now, there is another mutual fund scheme that has the same 20 companies in its portfolio but was launched in 2010. Based on the performance of the portfolio, the NAV of the scheme that was launched in 2000 would be higher or lower than Rs. 10, which is the NAV of the NFO .So, if the older scheme generates 10% returns in 2021, the NFO will also generate 10% returns as both the schemes have invested in the same companies. The low NAV vs high NAV does not impact their potential in any way. If you are avoiding a particular scheme as it has a higher NAV, in essence, you are penalizing the scheme for performing well.

Our innate urge to save money and search for cheaper alternatives often makes its way into our investment decisions. But in investments, expensive doesn't mean lesser potential, just as cheaper doesn't mean more profitable.Rather than the NAV, compare schemes based on their past performance and portfolio composition. Professional assistance is highly recommended if you are new to mutual funds.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.