No necessarily.
One tradition propagates that a fund with low NAV is cheaper. One can earn higher return if one buys a good mutual fund at undervalued NAV.
Practically, the NAV is totally irrelevant and should not even be considered when making an investment.
The ‘cost’ of a scheme in terms of its NAV has nothing to do with returns. Investors should keep an eye on ‘Cost effectiveness’. It is important because ‘cost effectiveness’ is synonymous to ‘yield’ or ‘Performance’. Low NAV does not necessarily mean the fund is undervalued.
How a fund can be cost effective?
Cost effectiveness is the return on an Investment Portfolio. Investors put up the dough in mutual funds for better yields.
But people often misjudge this fact that, lower NAV cannot guarantee higher yields. When we deal with it practically,
Investor A invests 5000 in X fund of NAV Rs. 20 and gets 250 units and he invests 5000 in Y fund of NAV 50 and gets 100 units. Later on, fund A rise to Rs. 24 and fund B rise to Rs. 60.
So it might appear that one has just risen by 4 rupee while the other by Rs 10, but in reality they have both have risen by 20%.
The number of units held also differs because A fund with lower NAV held more units and B fund with higher NAV held few units.
The ‘cost’ of a scheme in terms of its NAV has nothing to do with returns. What you want to buy in a scheme is its performance, not its NAV.
Undervalued NAV can certainly guarantee higher returns.
Higher NAV may adversely affect Investors when dividend has to be received. This usually happens because a scheme with Higher NAV consists few units and dividends are paid on Face value so, investors will get lower return on Higher NAV. But total returns will remain same.
So, from whatever angle, you judge the NAV will not make any difference on returns. Its only about the cost effectiveness and it can be find out by comparing funds over a similar periods.
The confusion for evaluating NAV arises because investors consider Fund’s NAV is like a stock price .
Stock prices are quoted on stock exchange and it largely depends on valuation and performance of the company, market forces, demand and supply in market, whereas the demand for Mutual Fund does not change NAV. The concept fund’s market value doesn’t exist. NAV is generally compared with face value of a share not its market value.
The next time Investors evaluating a fund, take a good look at the portfolio and returns over various time periods. Remember, it is the stocks that the fund manager has invested in that determine the returns. The value of the NAV is immaterial.