A closer look @ NAV ( Net Asset Value)

I was going through the portfolio of a new recently married client who is in his early 30s with a balanced risk profile (50% equity and 50% debt) and total investments of 40 lakh spread across 21 mutual fund schemes.

On my questioning him as to why the whole money is invested into equity mutual funds the client answered with a smile, I have bought almost all the NFOs which had hit the market since last 1 year at Rs 10 NAV.

Is it right?? Is this the way we choose mutual funds to buy? Are low NAV funds great??

Lot of questions with one simple answer

NO… NO… NO…

To understand why NO we should first understand

What is NAV and why is it important?

NAV or Net Asset Value is the value (total asset value) of the mutual fund which is calculated daily and published by the asset management company. In simple words the value of all the scrip’s in the mutual fund is calculated and from it all the expenses are removed. The remaining value is then divided by the total number of units of the fund. The result is NAV.

Take for example the total assets of an AMCs fund is Rs 100 crore, the liability is Rs 80 crore and the total number of outstanding unit is 200000 then the NAV will be 10 (use the above formula).

The day a dividend is declared by an AMC, the NAV falls equally as the dividend amount is reduced from the assets (see the formulae above). So it doesn’t make sense comparing NAV of exactly similar fund launched on the same day with same charges etc but one with 10 dividends declared ( nav will go down as dividends declared) and the other with none (nav will be higher as no dividend declared). Though the NAV for both these funds will be different the return including dividend if any will be same.

So what shall we look for when buying a mutual fund?

Keep Reading …shall be posting in a couple of days.

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