When investors consider mutual funds, one of the most frequently asked questions is about the Net Asset Value (NAV). Many investors prefer funds with lower NAVs, under the assumption that these funds will offer better returns compared to funds with higher NAVs. Some are also drawn to New Fund Offers (NFOs) simply because they start with an NAV of Rs. 10. However, these assumptions are often misguided. Let’s explore why and clarify some common misconceptions.

Understanding the Misconceptions Around NAV

Investors typically hold two misconceptions when comparing NAVs:

1. Lower NAVs grow faster and offer better returns, while higher NAVs are perceived to grow slower and generate lower returns.

2. Lower NAVs allow you to buy more units, which is often confused with receiving higher returns.

By diving deeper into how mutual funds operate, we can dispel these myths and understand the real factors that drive fund performance.

NAV vs. Portfolio: The Real Driver of Returns

The NAV of a fund reflects the market value of the assets it holds, and its movement is determined by gains or losses in the portfolio. Whether an NFO starts with a NAV of Rs. 10 or an established fund has an NAV of Rs. 400, both funds are likely investing in the same types of assets in the market.

For instance, let’s compare two funds: the ICICI Prudential Flexicap Fund, launched on July 19, 2021, with a NAV of Rs. 10, and the ICICI Prudential Multicap Fund, which had an NAV of Rs. 417.35 on the same day, having been around since October 1, 1994. While these funds had vastly different NAVs, their portfolios were strikingly similar:

Despite the difference in NAVs, both funds delivered almost identical returns over the next six months. The ICICI Flexicap Fund’s NAV grew from Rs. 10 to Rs. 11.03, while the ICICI Multicap Fund’s NAV rose from Rs. 417.35 to Rs. 460.75. In percentage terms, the returns were almost the same: 10.30% for the Flexicap Fund and 10.40% for the Multicap Fund. 

The Role of Fund Management

The key takeaway is that it’s not the NAV that determines a fund’s performance—it’s the expertise of the fund manager, the quality of the portfolio, and the timing of market moves. The same manager overseeing two different funds could generate similar results if the funds have comparable strategies and portfolios, regardless of their NAV.

Myth 2: Lower NAV Means More Units and Thus More Profits

It’s true that a lower NAV allows you to purchase more units for the same investment amount. However, this is often confused with higher profitability, which is not the case. The number of units you hold and the NAV are simply variables that determine the total value of your investment. What matters is the percentage growth of the NAV over time.

Let’s break it down:

In this scenario, despite owning significantly more units of the Flexicap Fund (10,000 units vs. 239.60 units in the Multicap Fund), the total investment value is nearly the same because the percentage returns are similar. Hence, the number of units is irrelevant if both funds grow at the same rate.

Additional Insights: What Investors Should Really Focus On

#1. Look at the Fund’s Objectives and Strategy

Instead of focusing on NAV, investors should evaluate the fund’s investment strategy. Is it a growth-oriented fund, or does it focus on value investing? Does it invest in large-cap or mid-cap stocks? These factors will play a far more significant role in your returns than the NAV at the time of investment.

#2. Historical Performance and Consistency

A fund’s historical performance over different market cycles can provide valuable insights into how well the fund manager handles volatility and market downturns. However, don’t get caught up in short-term performance; look for consistency over several years. A low NAV doesn’t guarantee better returns over time, and historical data is crucial in assessing fund management quality.

#3. Expense Ratios Matter More Than NAV

One overlooked factor is the fund’s expense ratio—the annual fee that funds charge for managing your money. A high expense ratio can eat into your returns over time. Comparing two similar funds, the one with the lower expense ratio is likely to offer better net returns, even if its NAV is higher at the start.

#4. Asset Allocation and Diversification

The underlying asset allocation—how much the fund invests in equities, debt, or other securities—should align with your risk tolerance. A well-diversified portfolio can cushion against market volatility, and understanding this allocation is crucial for long-term success.

#5. Risk Management

A fund with a high NAV but a proven risk management strategy might be a better bet than a new fund with a low NAV but little track record in managing market risks. Ensure the fund has a solid history of managing market downturns or corrections. Poorly managed funds, even with low NAVs, are less likely to sustain growth in challenging market environments.

Conclusion: NAV Is Just a Number

At the end of the day, NAV is simply the price at which mutual fund units are bought and sold. It has no bearing on how well a fund will perform. The real indicators of a fund’s success are its management strategy, market conditions, and the quality of its portfolio. Lower NAV funds don't have an inherent advantage over higher NAV funds in terms of performance. 

When selecting mutual funds, focus on aspects that truly matter—investment objectives, risk tolerance, expense ratios, and the long-term track record of the fund and its manager. Disregarding NAV will help you make smarter, more informed decisions that align with your financial goals. 

Happy investing, and always remember that the value of a mutual fund lies in its future growth potential, not in its current NAV.