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NAV is 'Not Applicable Value' in Mutual Fund Investments

Though NAV stands for the 'Net Asset Value'. Though NAV is the price you pay (or get) for each unit of a mutual fund scheme.

Yet... when you are buying (or selling) mutual funds, NAV is Irrelevant, Immaterial and Inconsequential.

Let's see how:

Investment A
Fund : UTI Nifty Index Fund
Amount : Rs.10,000
Date of purchase : Sept 13, 2012
NAV : 33.95
Units alloted : 294.551 (=10,000 / 33.95)

Date of sale : Sept 14, 2015
NAV : 49.67
Value : Rs.14,630 (=294.551 * 49.67)

Profit : Rs.4,630

Investment B
Fund : Reliance Index Fund - Nifty Plan
Amount : Rs.10,000
Date of purchase : Sept 13, 2012
NAV : 9.00
Units alloted : 1111.111 (=10,000 / 9)

Date of sale : Sept 14, 2015
NAV : 13.17
Value : Rs.14,633 (=1111.111 * 13.17)

Profit : Rs.4,633

Conclusion
NAV of UTI Nifty Index Fund was 3.77 times more expensive than the Reliance Index Fund NAV.

Yet, both gave EXACTLY the same returns (since the underlying portfolio of stocks is exactly the same 50 stocks that comprise the Nifty Index and in the same proportion).

mutual-fund-nav-is-irrelevant
Investing in a mutual fund, based on its NAV, is the biggest blunder.

Want more proof?

Investment C
Fund : Birla Sun Life Index Fund
Amount : Rs.10,000
Date of purchase : Sept 13, 2012
NAV : 53.40
Units alloted : 187.266 (=10,000 / 53.40)

Date of sale : Sept 14, 2015
NAV : 77.21
Value : Rs.14,459

Profit : Rs.4,459 

NAV of Birla Sun Life Index Fund was 5.93 times more expensive than the Reliance Index Fund NAV.

Yet, both gave EXACTLY the same returns (since the underlying portfolio of stocks is exactly the same 50 stocks that comprise the Nifty Index and in the same proportion).

[Note: The small difference is due to rounding off that I have done in the calculations and small variation in the expense ratios of the funds.]

In short, NAV is Irrelevant, Immaterial and Inconsequential when you are buying (or selling) your MF units.

Why?

Because, unlike price of onions, potatoes, shares, etc., NAV is not the "price" in that sense. Rather, it is an "average number" based on the prices of the underlying stocks in the portfolio and the total corpus of the fund. And two average numbers cannot be compared in the same manner as you compare two prices.

For example,
Average of 5, 5, 5, and 5 is 5.
And Average of 10, -2, 4 and 8 is also 5.
Yet, the two underlying series are totally different.

For example,
Average of 5, 5, 5, and 5 is 5.
And Average of 50, 50, 50 and 50 is 50.
Yet, the two underlying series are quite the same.

Therefore...
... it is meaningless to say that Rs.10 NAV Fund is cheaper than Rs.400 NAV Fund. It is like saying Sachin Tendulkar is better than Albert Einstein. The two simply cannot be compared at all.

Therefore...
... two funds with the same portfolio, will deliver exactly the same returns; no matter what NAV you invest at.

Therefore...
... what is relevant is the "Portfolio" of the Scheme.
... what is relevant is the "Performance" of the Scheme.
... what is relevant is the "PE Ratio" of the Scheme.
... what is relevant is the "Fund Manager" of the Scheme.
... what is relevant is the "Corpus" of the Scheme.
... what is relevant is the "Asset Management Company" of the Scheme.

Therefore...
... these are the parameters that you must focus on, when choosing which fund to invest in or redeem; and forget the Net Asset Value.

Therefore...
... if anyone sells you a fund saying it is cheaper at Rs.10 NAV, he is MOST DEFINITELY cheating you. Beware of such people trying to make a fool of you.

You Learn A Lot By READING... And Even More By SHARING.

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