Is Cheap (low) NAV better in Mutual Funds?

First, low NAV doesn’t mean that it’s a cheaper fund. Second, NO, cheap or low NAV is not better in mutual funds.

In reality, the NAV of a fund is irrelevant and ideally, it shouldn’t even be considered when making an investment decision regarding investing in mutual funds.

Let me explain in simple terms why low NAV doesn’t matter at all.

Suppose two friends invest in 2 different mutual fund schemes having identical portfolios. But their NAVs are different. One was launched several years ago and hence, has a higher NAV of Rs 200. While the other is a relatively new fund with a NAV of Rs 20 only. But both funds have exactly the same portfolio of stocks they invest in.

Both friends invest Rs 1 lakh. The older fund investor gets 500 units at a NAV of Rs 200 per unit. While the new fund investor gets 5000 units at NAV of Rs 20 per unit. So it is true that lower NAV would give you more units while higher NAV would give you a lesser number of units.

Now let’s say that both funds rise by the same 20%. Since the portfolio is the same, the fund appreciation will be the same as well.

A 20% rise in the older fund will increase its NAV from Rs 200 to Rs 240. While that of the newer fund will increase from Rs 20 to Rs 24. At the fact of it, you might say that the older fund has risen by Rs 40 while the newer one has risen by Rs 4 only. But that is not the right way to look at it. You need to compare the value of your investment.

So older fund investor having 500 units (purchased at Rs 200 per unit) will see their investment increase from Rs 1 lakh to Rs 1.2 lakh due to the rise in NAV from Rs 200 to Rs 240.

Not surprisingly, the new fund investor having 5000 units (purchased at Rs 20 per unit) will also see his investment increase from Rs 1 lakh to Rs 1.2 lakh due to the rise in NAV from Rs 20 to Rs 24.

So inspite of the different number of units held due to different investment NAVs, the eventual value of the investment is the same. This is the reason that concept of low NAV or high NAV is irrelevant. What only matters is the future % increase in NAV. That’s it. Mutual fund schemes should not be judged on their NAVs but on their performance.

This confusion about low NAV vs high NAV arises because many investors make the mistake of looking at the fund’s NAV like stock prices. But that is not the case. Both are very different animals.

Low NAV doesn’t mean a cheaper fund. High NAV doesn’t mean an expensive fund.

Is Low NAV cheap? Or is High NAV costly?

These questions are irrelevant as we explained earlier. Only the return on the fund is what matters. Lower NAV doesn’t mean a cheaper or a better mutual fund. Higher NAV doesn’t mean an expensive and costlier mutual fund.

NAV shouldn’t be used to compare funds at all. So don’t fall for the misconception about buying ‘Low NAV’ mutual funds! And it doesn’t really matter whether you invest in a Low NAV or Higher NAV mutual fund.

But what about the New Fund Offers (NFOs) of mutual funds coming at a low NAV of Rs 10 per unit?

If you extrapolate the idea of ‘low NAV is better’ and say that investing in an NFO is good just because it’s priced cheap at Rs 10, then you got it wrong. And it is this myth of ‘NAV of Rs 10 is cheap hence invest in NFO’ that commission-oriented mutual fund distributors love to exploit and convince new investors. I have written in detail about why not to invest in NFOs of mutual funds. If you want, you can read it and understand why investing in NFO isn’t a good idea. So don’t fall for the myth that New fund offers (NFOs) are cheaper since NAV is Rs.10 Low NAV mutual fund doesn’t mean it’s undervalued.

There is another aspect of low NAV vs high NAV.

NAV of direct plans of mutual funds is higher than regular plans. And that is due to the absence of commission (which is paid to regular plan selling mutual fund agents) in direct plans. You can read more about this here at why direct funds will always give higher returns than regular plans.

Many times investors search for the lowest NAV mutual funds to invest in. Or for mutual fund NAV below Rs 10. Here is a snapshot of some funds that are available below Rs 10 NAV (as of mid-April 2021) or as many would call it, mutual funds trading at discount to NAV:

Mutual fund NAV below Rs 10
Mutual fund NAV below Rs 10 (Source: Valueresearch mid-April 2021)

But lowest NAV mutual fund doesn’t necessarily mean it is undervalued. So if you are looking for low NAV good mutual funds in India (2021), then get your facts right that NAV doesn’t matter at all.

That is all about buying mutual funds at lower NAV vs higher NAV. Remember that the NAV of a mutual fund being high or low has absolutely no relevance to the decision whether to invest or not.

And here is one more thing to note. If you consider the history of good funds that have proven themselves as the best-performing mutual funds, you will notice that they are not necessarily those with lower NAVs or NAVs below Rs 10.

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Preferring low NAV over high NAV can be an erroneous strategy. It’s wrong to think in terms of buying mutual funds at lower NAV vs. buying at higher NAV. So to answer your question that is a mutual fund with low NAV better, then the answer is NO.

So don’t unnecessarily bother about trying to find a low NAV mutual fund list (2021) or the lowest NAV mutual funds in India. There is no right reason to believe the wrong myth of low NAV is cheap or high NAV is good.

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