Busting The NAV Myth.

Mr. X was very happy after he made his investments in mutual funds. He boasted about how he avoided some costly mutual funds whose NAV were above 300 and went for new funds available at Rs 10. His argument was that the old funds have already reached 300 so the chances of it climbing further are very low. In fact he got rid of some schemes he had bought few days ago after his advisor told him to sell high NAV mutual funds and instead invest in funds which have a low NAV. There are thousands of Mr. X who are following the same principle. They fail to realize that NAVs are different from share prices. A fund having a NAV of Rs.10 is the same like a fund having a NAV of Rs 300. In fact a fund with NAV of 300 has proved that it has performed well and has reached 300 whereas a new fund with face value of 10 is yet to prove itself. While rising or falling it is the percentage that counts. If a fund with a NAV of 300 falls to 240 it means it has fallen by 20% in the same way when a fund with a face value of 10 falls to 8 then it has fallen by 20% as well, but many people argue that it has fallen by only Rs.2 while the former has fallen by Rs 30. NAV of Rs.10 should not be the sole purpose of investing in a new fund. Another myth is that fund with a face value of Rs.10 wouldn’t fall much. Well there is no explanation for this. I can only say that a fund with a face value of Rs.10 can also fall to Rs.1. Moral of the story? Invest in mutual funds by not looking at the NAV but at the performance and theme of the fund.