Which one should you prefer: A mutual fund with lower NAVs or higher?

When investing in mutual funds, you should typically aim high but settle for a lower return than anticipated. Understanding the concept of "Net Asset Value" can be difficult for first-time investors due to its inherent complexity. Before deciding on an investment, it is highly recommended that you gain an understanding of the NAV first. Before we move on to finding a solution to the problem of whether it is better to buy mutual funds with a lower or a higher NAV, let's first get a better understanding of what NAV is.

What exactly is NAV?

A mutual fund is made up of multiple units, which are also referred to as unit shares. The market price of a mutual fund scheme is subtracted from the total value of the fund's liabilities per unit to arrive at the fund's net asset value. NAV, or net asset value, refers to the price of the fund you currently invest in. Due to any applicable exit loads and the Securities Transaction Tax (STT), your net returns will be lower than they could have been. This tax is imposed on redemptions from equity funds.

Acquiring mutual funds at prices that are below their NAVs

The meaning of lower NAVs could be any one of several things. A fund with a more significant number of units tends to have lower NAVs. Therefore, if you purchased low NAV mutual funds, you would receive more substantial units from investing in them. Many new investors believe that funds with lower NAVs are the better option to invest in because this is one of the reasons why they believe this. On the other hand, even if you have a more significant number of units in your portfolio, you will still get a better return in the long run.

Purchasing mutual funds at prices more significant than their NAVs

In general, funds that have been around for a considerable amount of time and have performed admirably throughout that time tend to have higher NAVs. It is because the fund's net assets would have increased as a result of the fund's successful performance over that time. If you chose to invest in high NAV mutual funds, then it would result in fewer units being transferred into his possession. However, this is not necessarily a poor bargain because the returns would be the same between two funds with identical portfolios, regardless of whether the mutual fund NAV is lower or higher. It is true regardless of which fund has the lower or higher NAV.

Many people in the finance industry believe it doesn't matter to investors whether the mutual fund NAV goes up or down. Because both of their portfolios are the same, they would end up with the same amount of money regardless of whether or not their investments increased in value. As a result, the mutual fund NAVs should be ignored in most cases if the mutual fund schemes have the same portfolios. It is because the cost of purchasing has a minimal impact on the returns.

Bottom Line

The critical takeaway is that your NAV level won't make that much difference. Instead, the returns of the mutual funds depend on the composition of the fund portfolio and how it is managed.