NAV stands for Net Asset Value. NAV is calculated by subtracting liabilities from total value of all the cash and securities in a fund’s portfolio, and then dividing the calculated value by number of outstanding shares. It is calculated for all the mutual fund schemes at the end of each business day using the closing market price of portfolio’s securities.
Is NAV something you should be considering for investment decision making? To answer this question, let’s consider a hypothetical scenario wherein 2 mutual fund schemes, let’s say scheme A and B hold same set of stocks as on today.
Scheme A was launched 5 years back and Scheme B was launched an year back. Scheme A was launched 5 years back at NAV of 10 and the current NAV of this scheme is 20, and scheme B was launched one year back at NAV of 10 and the current NAV of this scheme is 12.
If you invest 12000 rupees in both the schemes today, you will get 12000/20 = 600 units in scheme A, and 12000/12 = 1000 units in scheme B.
Let’s continue with the hypothetical scenario wherein both the funds hold same set of stocks for 5 years and the NAV is doubled after 5 years.
So, for Scheme A, maket value of the investment will be 600*40 (double of 20) = 24000 INR.
and for scheme B, market value of the investment will be 1000*24 (double of 12) = 24000 INR.
With the above example, it is clear that it does not matter if the fund we are investing in has higher or lower NAV. So, NAV should not be a parameter to consider during mutual fund selection for investment.