5 Reasons Why Fund's NAV Should Not Make You Anxious
Mar 30, 2017

Author: PersonalFN Content & Research Team

Markets have surged to hit their all-time highs. There is a hullabaloo about valuations, fundamentals of the economy, corporate earnings, etc. In line with the market, your equity mutual fund Net Asset Value (NAV) have probably peaked and you might consider jumping to redeem your units. But is this spike in NAV conclusive enough to take the leap?

In our opinion, the decision to sell your mutual fund units based on its NAV is a futile and a baseless exercise.

Here’s 5 reasons why a fund’s NAV should not affect your peace of mind:
 

  1. NAV is not a valuation metric

    The Net Asset Value or the NAV is the price at which a single unit of a particular mutual fund is traded. It is the total value of all the securities in a portfolio at the end of day.
     
    NAV = Net Assets / Outstanding Units


    It is different from buying shares, where you can value the stock by comparing the stock price to the earnings or book value of the company.

    Thus, the stock price could be higher (trading at a premium) or lower (trading at a discount) as compared to the book value (or what is also known as the intrinsic value) of a company depending on the underlying fundamentals.

    However, in a mutual fund scheme, there is no way of accurately evaluating whether the NAV is high or low because it represents a basket of securities from different industries where multiple metrics are needed to accurately value the business.
     
  2. NAV is not a performance indicator

    People commonly calculate returns on mutual funds by determining the difference between the fund’s current NAV and the NAV at which units were purchased. This is fine. But please recognise that, the approach of investing in mutual funds by judging its price – the NAV, cannot be followed. A higher NAV does not indicate that a fund has performed better than another with a lower NAV.

    This is because when you invest in a mutual fund, you buy units at its NAV,i.e. the current market price of all the assets that the mutual fund owns. It is thus representative of the total portfolio worth.

    Remember, increase or decrease in the NAV of a mutual fund scheme is a function of the performance of the underlying stock portfolio. This in turn is related to how well the fund manager makes his investment bets in the market, as well as how long the fund has been in the industry.

    Read: Mutual Fund Past Performance is Not Everything!
     
  3. A high NAV fund does not hold a potential to generate high returns

    Some perceive funds with a high NAV as promising for their investment portfolio, while a lower NAV is expected to yield lower returns. But that’s not true.

    Suppose two funds in the same category, say fund ABC and fund XYZ, commanding a NAV of Rs 10 and 100, respectively have generated equal returns of 20%; how will you gauge which of the two is better?

    Hence, a comprehensive assessment of the portfolio characteristics is essential. You need to understand the strategy adopted by the fund manager to clock returns: whether he/she has indulged in momentum playing, or has gone by the mandate and investment processes and systems set by the fund house.

    Also, a lot depends on the qualitative factors to select winning mutual funds while you may be lured by the returns. Amongst the quantitative ones there are parameters such as risk, risk-adjusted returns, and performance across market cycles, amongst a host of others that need consideration too.
     
  4. Less volatile fund NAV is not the best

    Another misconception about a fund’s NAV is its volatility. Many feel a fund which is least volatile is the best. But that’s not true!

    If you wish to check the potential exposure to risk, pay attention to its risk-adjusted returns (denoted by the Sharpe Ratio) of a fund at certain level of risk (denoted by Standard Deviation). That will be a more meaningful quantitative measure to select winning mutual fund scheme for your portfolio.

    Read: Why Comparing Returns to Risk Is More Meaningful!
     
  5. Qualitative factors need to be checked

    So, please recognise that NAV’s are irrelevant when selecting winning mutual funds for your portfolio. A lot of qualitative and quantitative factors have to be thoroughly analysed before zeroing down on any mutual fund scheme. As an investor, you need to consider factors such as your own risk profile, the fund house’s management style and the mutual fund’s performance. Hence, the few other guiding factors in making better investment decision are:

    Investor Risk profile
    Fund management style
    Mutual fund past performance
    Fund's risk management strategies

    Read: 6 Ultimate Secrets to Beating the Market By A Whopping 70%!

To sum-up

A spike in NAV of your fund should not compel to sell off your holdings, steal your peace of mind, and/or give you jitters’.

We believe that to select winning mutual fund schemes for your portfolio, NAV is not an appropriate indicator. Investors should consider investing in funds based on a host of qualitative, quantitative, and fundamental factors in play.

So, the next time your mutual fund distributor / agent / relationship manager tries to sell a fund on an illogical premise, rightfully question him/her in the interest of your long-term financial wellbeing.

Only when you have achieved your preset goals, it is alright to liquidate your fund.

Read: Why should you dump your relationship manager and get yourself a Financial Guardian

Do not get carried away by the luring sales pitch he/she skillfully presents.

Invest your hard-earned money prudently in your journey of wealth creation. Take into account your long-term financial goals, risk profile, and asset allocation. This way you have the right investment avenues, and adopt financial discipline.

We wish you Happy Investing!!



Add Comments