The start of the monsoons has made Pluviophiles very happy – they love the rains and find joy and peace when it pours.

But many shopaholics out there have ulterior motives and are looking for The End of Season Sale!!

“When I shop, the world gets better” . Remember Rebecca Bloomwood from the movie Confessions of a Shopaholic?

Buying the best brands at the best price during end of season sales is not uncommon. There’s a tendency to check the price of the product or look for other more economical substitutes.

But unfortunately, this practice prevails even amongst investors selecting Mutual Fund schemes for their portfolio. They often check the Net Asset Value before investing, as if they’re buying stocks. It always plays on the mind that lesser the NAV, the better it is – perceiving it to be a buying opportunity. So, when a New Fund Offer (NFO) hits the market, many investors rush to buy lured by the ‘Rs 10’ proposition, without recognising the traits of the mutual fund schemes and if it syncs well with their financial goals envisioned and risk profile.

In our view, assessing a fund’s NAV before investing is an absolutely futile and baseless exercise.

The Net Asset Value or the NAV is the price at which a single unit of a particular mutual fund is traded. It is the total value of all the securities in a portfolio at the end of day. In other words, the NAV represents the fund’s intrinsic worth as on a particular date.

NAV = Net Assets / Outstanding Units

It is different as against buying stocks, where the price could be higher (trading at a premium) or lower (trading at a discount) as compared to the book value (or what is also known as the intrinsic value) of a company depending on the underlying fundamentals.

But for naïve investors, checking NAVs of a mutual fund scheme runs into their nervous systems. What they fail to recognise is mutual fund schemes trade at their book value; so you never buy them cheap or expense in that sense.

Here are some misconceptions about a mutual fund scheme’s NAV...
 

• Buying at the right NAV = Art of selecting winning mutual funds
  
  By chance, you may have timed your investment well, but the fact remains that no one can time the market.
  
  Some even perceive funds with a high NAV as promising for their investment portfolio, while a lower NAV is expected to yield lower returns.
  
  Suppose two funds in the same category say, ABC and fund XYZ commanding a NAV of Rs 10 and 100, respectively have generated equal returns of 20%; how will you gauge which of the two is better?
  
  Hence, a comprehensive assessment of the portfolio characteristics is essential. You need to understand the strategy adopted by the fund manager to clock returns: whether he/she has indulged in momentum playing, or has gone by the mandate and investment processes & systems set by the fund house.
  
  So, a lot depends on the qualitative factors to select winning mutual funds while you may be lured by the returns. Amongst the quantitative ones there are parameters such as risk, risk-adjusted returns, and performance across market cycles, amongst a host of others that also need consideration.
   
• Buy into funds whose NAV is less volatile
  
  As mentioned earlier, NAV reflects the intrinsic value of the fund. Thus, volatility cannot be the measure as for stocks. If you wish to check the potential exposure to risk, pay attention to Standard Deviation and the risk-adjusted returns (denoted by the Sharpe Ratio) of a fund. That will be a more meaningful quantitative measure to select winning mutual fund scheme for your portfolio.
   
• Funds with similar NAV band have similar portfolio
  
  There is no said rule that funds with similar NAV band will have similar portfolio and therefore will generate similar returns. At the most, funds in the same category may move in one direction; but here too it depends how prudently the fund manager has played his role.
   

  Scheme Name	NAV(in Rs)	3 Years (%)*
  Franklin India Bluechip Fund (G)	362.23	17.14
  HDFC Large Cap Fund (G)	85.69	9.59
  ICICI Prudential Focused BlueChip Equity Fund(G)	29.15	17.83
  Principal Large Cap Fund (G)	45.74	18.25
  SBI BlueChip Fund (G)	29.72	22.94

  NAV and Performance as on June 13, 2016
  *The returns expressed are in CAGR terms
  (Source: ACE MF, PersonalFN Research)
  
  In the table above, exhibiting the returns on large cap funds, both Franklin India Bluechip Fund (FIBF) and ICICI Prudential Focused Bluechip Equity Fund(IFBEF) have generated approximately 17% CAGR, but their NAVs are different and so is their portfolio composition.
  
  Generally older funds have higher NAVs, but there is no guarantee that they will generate good returns. Therefore, when you’re confused between which to select, do a comparative study on qualitative and quantitative parameters to assess consistency in returns delivered guided by the investment mandate, rather than the fund having lower NAV.
   
• Buying at Rs 10 during NFO will provide quick gains
  
  This fallacy inscribes a trait of a trader and not an investor. You cannot expect listing gains in a mutual fund scheme.
  
  It is important to understand that a NAV of Rs 10 during NFO is just a start price. There is no underlying valuation of the fund for the price you pay. When a fund house comes up with a NFO, it is simply collecting funds from you, pooling it, and further investing in securities. The fund’s Scheme Information Document (SID) is akin to the Bible stating the investment mandate. There is no track record or guarantee that the fund will generate super normal profits.
  
  Therefore, if you expect starry returns founded on this delusion, you may land up with a bag of disappointment and/or worse still, financial loss. Likewise, do not redeem from a particular mutual fund in order to invest in other fund having lower NAV, or worse, invest in a New Fund Offer (NFO); this strategy may not yield the desired returns.

 

To sum-up...
We believe NAV is not an indicator to select winning mutual fund schemes for your portfolio. Investors should consider investing in funds based on a host of qualitative, quantitative, and fundamental factors in play. So, the next time your mutual fund distributor / agent / relationship manager tries to sell a fund on an illogical premise, rightfully question him in the interest of your long-term financial wellbeing. Do not get carried away by the luring sales pitch he/she skilfully presents.

Invest your hard earned money prudently in your journey of wealth creation. Take into account your long-term financial goals, risk profile, and asset allocation. This way you have the right investment avenues, and adopt financial discipline.

We wish you Happy Investing!!
 

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Comments
seetharam_sudhir@yahoo.com Jun 17, 2016 having read your article , You have stated that to pay attention to Standard Deviation and Risk adjustment return (sharp ratio) of a fund-that will be more quantitative measures of selecting mutual fund scheme. What exactly you mean, how is Standard deviation and sharp ratio helps for a illiterate MF investor, You further say that quantitative and qualitative parameter what does it mean and how they are to be checked and what way they help the investor.  for the chart given Franklin india bluechip equity fund growth its nav 362.23 and 3 years % return is 17.14   for the chart given Icici bluechip equity fund growth its nav 29.15 and 3 years % return is 17.83. comparing above and a lay man like me may say ICICI bue chip MF is better than the Franklin India blue chip MF.   Will you please be specific in your narration and help a investor like me to take decision on the matter.
seetharam_sudhir@yahoo.com Jun 17, 2016 Many of your postings are informative, but in needs detailed calculations or an example to guide the investor, Illustrative examples are the best media in teaching young learner in the field of Mutual fund....Can you name a book where I could get complete details, brief descriptions, and the parameters and ratios to be checked in mf and as to how to calculate them....I don't know if this question finds reply...

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