Skip to main content

"What is the level of NAV?"

As much as I hate to admit this, mis-selling in the Indian mutual funds (MF) industry is as much the industry's and the agent's fault, as much as the investors'. Ok, well, the MFs and agents have the upper hand, but investors clearly get swayed by greed and agree to buy whatever comes their way, without wondering what they're getting into.

For instance, one question that many people ask me after I recommend a fund for them is: "What must be the NAV of this fund now?" If I say something like 70+ or even 100+, they immediately retort by saying it's too expensive! Even regular readers of my magazine and those whom i advice regularly about MF investments, raise this doubt every once in a while about my recommendation's NAV level. The lower the NAV, they say, it's cheaper to buy it. Despite educating investors and readers regularly, this is the biggest MF myth that we (responsible) correspondents and analysts have repeatedly tried to break, but, with very negligible success. It's called the 'Rs 10 myth'. In simple words, a fund whose NAV is at Rs 10 is not necessarily better than the fund whose NAV is at Rs 50.

Let me explain. Assume there are two funds, 'fund A' whose NAV is at Rs 10 and 'fund B' whose NAV is at rs 50. Assume also that both these funds have invested their entire corpuses in HUL at, say, Rs 100 per share. Now if HUL moves up by 5 per cent, both the funds would also move up 5 per cent. So A's NAV will be 10.5 and B's NAV will be 52.5. Both the NAVs have gone up by an equivalent margin, i.e. 5 per cent. If however, if A had invested in HUL whose market price went up by 5 per cent, and B had invested in ABB that went down by, say, 10 per cent, fund A would hve experienced a gain, while fund B would have experienced a loss.

How high or low a fund will go, depends on the underlying investments of a MF scheme. Investments in MFs is different from investment in shares. While equity shares are bought of companies that you think would do well in future and whose share prices would rise to reward you, a mutual fund is an investment vehicle through which you invest in a variety of companies by buying their shares and bonds. A share price goes up or down, depending on what the equity market perception is about that company in terms of its future growth, sales, profitability and business model.

A mutual fund’s net asset value (NAV) - similar to a share price - doesn’t rise or fall the same way. As mutual funds invest in shares and bonds of companies, it depends on the fund manager’s intellect and perception about which companies, in his opinion, would or won’t do well. He’s a professional in whose hands you entrust your money in, to manage on your behalf. If the underlying companies do well, your MF’s NAV rises, else it falls. Your MF’s performance, therefore, hinges on your fund manager’s ability to pick up the right kind of stocks and profit from them. Hence while a company with a lower share price, in many cases, is better than those with a higher share price, a lower NAV MF is not necessarily better than a higher NAV one, because a share price is largely driven by market perception and a MF’s NAV is more of a function of its fund managerial skills.

The true picture: The next time you see a higher NAV, remember that the fund's NAV is higher than others is because this fund, and thereby its NAV, has been in existence for a long time. Since a new fund starts at Rs 10, over a period of time and years into its existence, the fund's NAV would gradually and eventually keep rising. This is why its NAV is higher and not because it is "over-priced" or something. Actually, MFs can never be over-priced or under-priced. As NAV stands for Net Asset Value, it just reflects the value of the underlying assets, plus all the profits that it has booked since its inception.

Comments

Popular posts from this blog

US-64 DRAWS TO A CLOSE; WHAT SHOULD YOU DO?

As the country oldest mutual fund scheme, now US-64 Bonds, are set be redeemed, it’s tough to find an equally alternative investment. There are some that come closeThe oldest mutual fund scheme in India, Unit Trust of India (UTI)’ Unit Scheme – 64 (US-64), will soon be no more. After more than 40 years of existence, curtains will fall on the US-64 bonds that mature on 31 May 2008. UTI has already sent out letters to all bond-holders about the redemption; investors are told to submit their original certificates, take their money back and leave.

For investors like Kolkata-based, Kumaresh Mukherjee, 72 it’s the end of an era. Soon after he retired from Philips India, he invested his provident fund corpus in fixed – return instruments like company fixed deposits. An electrical engineer by profession, in 1995 he also invested Rs 12 lakh or around one-third of his retirement corpus in the erstwhile US-64. After years of above-average returns, then trapped doors and turmoil that shook the Ind…

Pay Credit Card Bills Through ATMs

Tired of being ignored by ICICI Bank credit cards by being left out of their premium services despite being a loyal customer, I got myself a new credit card by HDFC Bank. It's another thing that HDFC Bank promised me a gold card with a higher spending limit, but then threatened to give me a silver card. When I strongly protested to their ways, they issued me a gold card, but with a much-lower-than-promised spending limit. I think the credit card companies ought to be made more accountable through stricter laws that are widely publicised (I recently read an RBI advertisement in the paper that if a credit card company rejects your application for a credit card, it has to give the reasons in writing; I never knew that!!!) and ought to made to pay for promising one thing, but delivering something totally different. SBI Cards too chased me for a month last year and promised to give me a platinum card with a high spending limit. What I finally got was a much-watered down Gold Card with …

Teachers at Hindi Vidya Bhavan

Being a huge fan of the late Behram Contrator, the founding editor of Afternoon, I have read many of his legendary column, 'Round & About'. In one of them, he makes a poignant irony: that although teachers are our torch-bearers throughout our school and college days, give us education and make us capable of facing and surviving in this world, they would always remain in that one place, while their students would go places in thier lives. Like a teacher would still be at the bus-stop waiting for the bus, all throughout thier lives, while the child will grow in status and stuture and pass by in car. I found that to be very true, so I look back - the least I can do, and appreciate the teachers who have taught me and have a hand to make me who I am today. And while I am at it, let me also tell you about some of them who, unfortunately, I did not like.

I did my schooling (SSC)from Hindi Vidya Bhavan (HVB), Marine Drive, Mumbai. I passed out my school in 1992, so this post will …