“Where can I see the NAV of my fund?” a user asked me.
“Why do you need to see it?”
The user went silent. I did not understand. Is it because the user thought I was dumb to ask the question?
“How do I know the current price of my fund?”
“Well, how does it matter?” I persisted.
“What do you mean? I need to know if the fund is expensive or cheap.”
Oh! So, that’s the reason.
Unfortunately, it is not the right one.
OK, let me announce that NAV as a stand alone number is of no use to you as an investor.
Before you jump to any conclusion about the sanity of my mind, let me explain.
NAV or Net Asset Value is the value of the funds investments or assets (minus) all the liabilities. In simpler words, call it the net worth of the fund scheme.
Every day, the fund uses the market prices of its holdings, deducts all applicable expenses/charges and arrives at the Net Asset Value or NAV.
When this NAV is divided by the total number of units, it becomes the NAV / Unit. In fact, NAV per unit is the number that is publicly available for the investors and the general public to see.
There are 2 purposes that the NAV serves, in my view:
ONE. It allows allotment of units to new investors. NAV / unit just makes it easy. Divide the amount invested by NAV and you get the units to be allotted to you.
TWO. A series of NAVs over a period of time allow you to determine the performance trend and analysis of the scheme’s risk profile. So, when you are looking to calculate 1 year, 3 year, 5 year returns or calculate a Sharpe Ratio, Sortino Ratio, Treynor Ratio, etc. you need NAV values over a time frame. Any one year will have 250+ NAV values.
That’s the simple use of an NAV or a set of NAVs.
Quick Trivia: NAVs are always calculated upto 4 decimal points.
The Biggest Myth about NAV
The market has its own ways and there are a few myths that exist around using or understanding NAV.
Let’s take the biggest one today.
See this example.
Two funds ABC and XYZ are large cap funds.
ABC Fund has NAV of Rs. 214. 3454.
XYZ Fund has NAV of Rs. 133.2541.
Question: Is ABC fund more expensive than XYZ?
That brings us to the biggest myth – a fund with higher NAV is expensive.
Many investors believe that NAV is similar to a stock price. The fact is that an NAV is not like a stock price. A stock’s price reflects its inherent worth and/or the expectation of the market about the business of the company represented by the stock unit.
That is not the case with NAV.
An NAV is just an aggregation of the values of the underlying holdings. A fund with a higher NAV either reflects that the fund has been well managed and made investments that have done really well, or, it has purely existed for a longer period of time thus accumulating more gains and increasing its NAV. (Go back above to see how NAV is calculated.)
So, counterintuitively, the higher NAV fund can be a better investment.
Let me further illustrate this.
You know that the NAV of direct plans of a scheme is higher than its regular plans. Now a mis-seller can use this point to sell a regular plan to you. You feel happy that you have got more units for your investment.
Sorry to break the ugly truth to you. A direct plan has a higher NAV because it has less expenses and hence more of its gains are available for the fund scheme. These extra gains because of lower expenses increase its Net Asset Value.
A simple way to check this is to look at yearly gains of the direct plans vs regular plans. A direct plan always shows a higher return compared to the regular plan. The difference is because of the lower expenses in the direct plan.
The same trick is used to sell new fund offers or NFOs to you. The Rs. 10 NAV is the biggest myth in town. Beware!
Have the lights turned on? Do let me know your understanding on the NAV. The comments section awaits your feedback.