Are Investors Being Misled by False Impressions About NAVs

Saturday, July 22, 2017

Are Investors Being Misled by False Impressions About NAVs

The recent drive to clear some of the common myths about investing in mutual funds notwithstanding, some of the basic terminology of mutual funds is actually quite confusing for a new investor and even some savvy investors will also agree that they don’t fully understand some of the jargon when it comes to how mutual funds work. Some of the performance metrics typically used to sell mutual funds to customers can sometimes be misleading. 

Terms like NAV or Net Asset Value and dividend do not always mean what a new investor would assume they do. A high or low fund NAV is not something that is likely to affect the returns you get on your invested corpus. 

The actual NAV and number of units you own are irrelevant. In fact, what really matters is the type of companies a mutual fund invests in and how the fund manager runs it. If a fund gains 20%, the Rs 1 lakh you invested in it is going to grow to Rs 1.2 lakh. It is immaterial whether this is 10,000 units at an NAV of Rs 12, or 100 units at an NAV of Rs 1,200. 

Essentially, a fund with an NAV of Rs 10, and a different fund with an NAV of Rs 100 will generate the same returns if their portfolios are the same. So there’s no real reason to decide whether or not to invest in a fund based on NAV alone. In fact, if a fund salesperson or ‘adviser’ is using this rationale to convince you to invest in a particular fund, he/she may deliberately be misleading you. 

Just like NAVs, many mutual funds also use dividend to indicate the performance of the fund which is another misleading tactic. The dividend actually comes out of your own investment instead of being re-invested to create greater returns. The NAV & dividend should only be used to compare the mutual funds performance against its own over a long period to evaluate its returns.

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