Funds
with higher NAV are performing better than those with lower NAV..
Many
investors have misconceptions about the NAV of mutual funds (MFs), about how
NAV is linked to a fund’s performance and their returns.
Net
Asset Value (NAV) in simple terms is the current worth of each unit of the MF.
NAV,
which is calculated as assets minus liabilities of a scheme, is declared by
fund houses daily. Below attempt to bust one popular NAV related myths.
Myth
:
Funds
with higher NAV are performing better than those with lower NAV..
Sometimes
investors tend to link NAV to absolute returns of a fund. Therefore higher NAV
is taken to be synonymous with higher return. This is not necessarily true.
NAV
sure is a tool to measure performance. But, NAV is not a performance indicator
in itself. It is change in NAV of two dates that reflects performance of the
fund in the period between those dates.
However
it is true that with age NAV increases; that’s why older funds tend to have
higher NAVs.
For
instance suppose you invest in a fund with NAV 10 which grows to 60 in 10
years. At the same time your neighbor invests in another fund with NAV 150
which grows to 250 in the same period. Although NAV of the latter was much
higher its annual return is only 5% compared to 20% of your fund.
What
is important is that you select a good fund (as known from its past performance
over various market cycles), backed by strong fundamentals, irrespective of
whether its current NAV is in double digits or triple digits.
Source:
Quantum AMC
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