What does the lower mutual fund NAV mean?
I keep hearing from people that a mutual fund NAV has come down or a mutual fund is available with lower NAV and we need to grab the opportunity to buy such mutual funds. What does the lower NAV of mutual fund mean? Does this benefit the investors?
What is mutual fund NAV refers to?
NAV stands for Net asset value. NAV of mutual fund is the net asset value of a mutual fund units. NAV of a mutual fund is arrived by mutual fund Company with below formula
Total value of the investments – expenses – liabilities
NAV = ——————————————————————-
Total no of units issued
Mutual fund NAV for new fund offers
All new fund offers, NAV is fixed at Rs 10. It means the mutual fund investments can be purchased with NAV of Rs 10 for new mutual fund offer.
Is there any premium charged by Mutual funds like it happens for shares IPO?
If any company is issuing shares, it would charge premium on the base share unit value of Rs 10 (or lesser value depending on the price of the stock). The premium can be say Rs 5 and total share price would be offered for Rs 15. Companies issue shares at premium as they are doing the business and the benefits are available to share holders as soon as they become shareholders.
However for new fund offer or mutual fund which has been there for some time, providing good returns, the mutual fund holders would not be paying any premium as there is no business existing and it is the investors money which is invested in stock markets, debt instruments etc. However they would be deducting all expenses which are spent by mutual fund Company towards maintaining these mutual fund schemes before they arrive at the NAV of a mutual fund.
Mutual funds are available at a lower NAV, can we buy?
The final question comes is in case the mutual funds are available to buy at lower NAV, can we buy? There are two scenarios for lower NAV for mutual funds.
- Mutual fund NAV has come down due to stock market fluctuations: The pattern would be seen across all mutual fund schemes. The reduction in NAV value may not be same across all schemes as each one has different investment objectives and based on which they would have invested. We need not worry about NAV downfalls in such scenario as they are common when stock market falls or crashes. If you see the trend of the returns over 3 to 5 years, it would be clearly evident about the performance of the mutual fund. In general such mutual funds would provide excellent opportunities as the down trend might be a short term due to market crash and not that mutual fund has not performing well.
- Mutual fund NAV has come down – But market is rising or stable: Investors needs to be little cautious under this situation. When markets are stable or rising, why NAV should show a down trend. One of the reasons can be such mutual fund schemes would have invested in mid cap or small cap stocks. Such stocks value might have reduced, whereas Index stocks have continued to rise or was stable. If you see the trend of the mutual funds returns along with other mutual funds, it would be easy make out such under performing mutual funds which are available with lower NAV. Investors should stay away from such mutual funds.
Conclusion: If an investor thinks that mutual fund scheme has been available with lower NAV, he/she should be very cautious before investing in them. These two scenarios would help investors to take an investment decision.
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