How Does A Lower And Higher Mutual Fund NAV Affect An Investor?

Mutual Fund Net Asset Values (NAV) are the most important indicator for a mutual fund investor. In fact, unless you are investing through the Systematic Investment Plan (SIP) it makes sense to look at the net asset value of a mutual fund scheme very closely.

How is mutual fund NAV calculated?

Mutual fund net asset value takes into consideration the total expenses of the fund, including salary and other administrative fees and its investments, whether they are debt or equity. These are than divided by the number of units.

This is a very simplistic way of explaining how a NAV of a fund is calculated. Let us now understand this with the help of an example.

Let us say that the total investments of a fund including debt and equity is Rs 1 lakh. If the cost to manage the fund and the other expenses are Rs 2,000, and the outstanding units are 5000 than the calculation is as follows:

Rs 1 lakh - Rs 20,000/5000 = 9.6

So, we can say that the net asset value if Rs 19.6. This is just a simplistic example.

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Importance of lower and higher NAV for the investor

The net asset value is perhaps the single most important factor to look for, especially if you are investing in equity linked mutual fund schemes. It is also extremely important if you are investing a lump sum and not through an SIP.

Now, let's see why the NAV is very important. If you are planning to invest a lump sum you must track the NAV.

Let's assume you want to invest Rs 50,000 in a mutual fund scheme. If the NAV a month back was Rs 12, you would get almost 4167 units.

Now, let's say you have waited patiently and the NAV has fallen to Rs 11.50. You would now get 4348 units, which is certainly more. However, in most of the cases it is almost impossible to know at what NAV to buy, as a funds performance would largely depend on the markets.

But, generally speaking you should seek expert advise before investing a lump sum. For example, when the Sensex was at 30,000 points many investors thought that it would cross 32,000 points and they invested in mutual funds.

In fact, that did not happen. Today, the last three month return of mutual fund schemes has been negative and many funds have just about managed to generate positive returns in the last one year. It is therefore important to seek advise before you buy.

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