Does the net asset value (NAV) of a fund impact an investor’s returns?
Suppose someone invests Rs 10,000 in a mutual fund when the NAV is Rs 10. He is allotted 1,000 units of the fund. Subsequently, the NAV of the fund rises to Rs 20. Another person now invests Rs 10,000 in the same scheme. He gets only 500 units.
Now, if the fund declares a 50% dividend, the first investor will get Rs 5,000 (Rs 5 x 1,000 units) while the second investor will recieve only Rs 2,500 (Rs 5 x 500 units).
The second investor earns a lower return because his purchase price was higher. Does this not mean that if you buy a fund with a low NAV you get more units and hence your returns are greater?
— Naresh Narasimhan, Bangalore
A fund’s NAV has no bearing on investors’ returns. The comparison should be between investments made at the same time.
In your example, the investor who entered when the NAV was Rs 10 gained because he entered when the markets were low. The second investor did not do as well because he entered when the markets went up and the NAV was Rs 20. Here’s an illustration:
An investor puts Rs 10,000 in Fund A when the NAV is Rs 10. He is allotted 1,000 units of Fund A.
At the same time another investor puts Rs 10,000 in Fund B when the NAV is Rs 20. He gets 500 units.
Both funds do equally well and their NAVs rise by 30%.
NAV of Fund A = Rs 13
NAV of Fund B = Rs 26
First investor’s investment is worth Rs 13,000
Second investor’s investment is also worth Rs 13,000
Fund A declares 10% dividend or Re 1 per unit
Fund B declares 20% dividend or Rs 2 per unit
First investor gets Rs 1,000
Second investor gets Rs 1,000
NAV of Fund A after payment of dividend = Rs 12
NAV of Fund B after payment of dividend = Rs 24
First investor’s investment is worth Rs 12,000 (plus dividend of Rs 1,000)
Second investor’s investment is also Rs 12,000 (plus dividend of Rs 1,000)
If both funds declare 10% dividend (Re 1 per unit)
First investor gets Rs 1,000
Second investor gets Rs 500
NAV of Fund A after payment of dividend = Rs 12
NAV of Fund B after payment of dividend = Rs 25
First investor’s investment is worth Rs 12,000 (plus dividend of Rs 1,000) = Rs 13,000
Second investor’s investment is worth Rs 12,500 (plus dividend of Rs 500) = Rs 13,000
So the NAV does not matter. What matters is the fund’s performance. We assumed that both funds did equally well. That is not always true. The best equity fund grew 48% in the past one year while the worst performer fell by 12% during the same period. Before you invest, spend a little time in choosing the right fund. To find out the best funds to invest in, refer to our fortnightly listing and also watch out for our quarterly and annual listing of the best mutual funds.
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