Its a common wisdom that it's good to buy anything cheap. And that's exactly what works fine for equities. You buy them cheap and sell them at higher price. All good.
Now, coming to mutual funds, should you similarly buy funds with low NAV? The answer to that is "it does not really matter". If you know this, you can ignore this post.
However, if you are wondering that why it does not matter, then here is the answer. NAV is not the price of the mutual fund that you buy, and hence the same logic does not apply.
During an NFO (New Fund Offer), a fund house (AMC) makes an offer. Now, say 10 people invested in that fund say Rs. 100 each.
- Now the fund corpus stands at Rs. 1000
- Each of the 10 individuals have for 10 units each of Rs. 10
Now, the fund when listed has invested this Rs. 1000 in equities and debt instruments, and over the period has made some profits and the money has finally grown to be 1600.
- Now the fund corpus stands at Rs. 1600
- Each of the 10 individuals have 10 units each
- In order to reflect the profit of each individual, NAV of the fund has grown to 16
Now, when as an eleventh investor I want to buy fresh units in the fund. I need to buy it at 16, so that the profit made by those intial 10 investors does not really get disctributed. Makes sense right?
Hence, any day it does not matter whether NAV is low or High, what matters is
- What's the performance of a fund?
- Where does it typically invest?
- How well it has performed during market crashes?
- And so on ...
So, let's now put Low/High NAV question to rest forever.
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