scorecardresearchYour Questions Answered: Should I invest in a mutual fund SIP with a high NAV?

Your Questions Answered: Should I invest in a mutual fund SIP with a high NAV?

Updated: 20 Jan 2023, 08:04 AM IST
TL;DR.
Investors should not be guided solely by NAV when investing in mutual funds. The decision to invest must be based on a fund's performance, risk-adjusted ratios, quality of the portfolio, etc.
When we buy a mutual fund at its NAV, we are buying it at its book value.

When we buy a mutual fund at its NAV, we are buying it at its book value.

Q1. Should one opt for an SIP, if a fund’s NAV is very high?

Net asset value (NAV) is the sum of the market value of all the shares held in a portfolio (including cash, and minus liabilities), divided by the total number of outstanding units. NAV is often referred to as the book value of a unit.

A fund with a low NAV is perceived by investors to be cheaper or more reasonably priced than one with a higher NAV. It follows that many prefer to avoid funds with high NAV.

The NAV of a fund is not like the stock price of a company. The prevailing price of a stock could be lower or higher than its actual value. But NAV reflects the current value of the portfolio as is. Its NAV should not be the deciding factor for making an investment in a fund.

Say, you have 1 Lakh to invest. You are considering two funds with the same portfolios but different NAVs. The NAV of Fund A is 50 while that of Fund B is 100. You decide to invest 50,000 in both schemes. You will get 1,000 units of Fund A (50,000 divided by 50) and 500 units of Fund B.

After one year, let's assume the funds have grown by 10%. Now their NAVs would be 55 for Fund A and 110 for Fund B. The value of your investment would be 1,000 units x 55 = 55,000 for Fund A, and 500 units x 110 = 55,000 for Fund B. Thus, the returns are the same irrespective of NAV.

When we buy a mutual fund at its NAV, we are buying it at its book value. And since we are buying it at its book value, we are paying the right price for its assets, whether it is 50 or 100.

What you want to buy in a scheme is its performance, not its NAV. Hence, you need to look at the performance, risk-adjusted ratios, quality of the portfolio, AMC track record, etc. before investing in a particular scheme. Evaluate a fund based on its underlying portfolio, mandate and returns over various periods.

Do not panic sell mutual funds when the NAV value drops. The decision to exit from mutual funds should be taken considering various other factors.

Q2. I wish to invest 2 lakhs for the long term. Do I invest right now or wait for a correction?

Investments must be made in accordance with your goal and planned asset allocation, without waiting for a market correction. If you keep waiting, you may end up losing money.

Volatility is inherent in the market, which makes it extremely difficult to predict its direction. You may diversify your investments or stagger it over time to capitalise on market volatility. As you are looking at a long-term investment, we suggest you avoid trying to time the market.

For example, suppose you decide to invest 2 lakhs in an index fund and have two options: Invest all at once or stagger your investment. If you choose the second option, you can begin by investing the money in a liquid fund and setting up an automated systematic transfer plan (STP) at regular intervals. The advantage of this plan is that you will not be completely out of the market if the market steadily goes up and never corrects.

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Article
Understanding NAV
First Published: 20 Jan 2023, 08:04 AM IST