The equity market at an all-time high<\/a> has made it challenging to find good stocks at a lower price. With Sensex above the 60,000 mark and broader market at an all-time high, investors are actively participating in Initial Public Offerings (IPOs). Investing in IPOs enables investors to benefit from the growth potential of a stock when they are available at low price.<\/p>\n\n\n\n Considering the expensive valuations in the equity market, should consider buying equity mutual fund schemes that have low NAV?<\/p>\n\n\n\n And,<\/p>\n\n\n\n Does buying a mutual fund with high NAV mean the fund is expensively priced?<\/p>\n\n\n\n First let’s understand what is mutual fund NAV…<\/strong><\/p>\n\n\n\n The Net Asset Value (NAV) of a mutual fund scheme is the value of its assets minus liabilities, i.e. its networth. In other words, it is the market value of all the securities that the scheme holds. This value is divided by the number of outstanding units (the number of units that the fund has issued to investors) to calculate the NAV per unit. Since the markets are dynamic in nature, the NAV changes every day.<\/p>\n\n\n\n NAV per unit = (Total Assets – Total Liabilities) \/ Total Number of Outstanding Units<\/em><\/p>\n\n\n\n Mutual fund houses disclose the closing NAV of each scheme after deducting expenses<\/a> towards management, administration, and other costs, on a daily basis. All purchase and sale transactions of mutual funds take place at the closing NAV of the scheme.<\/p>\n\n\n\n It is a common misconception among investors that buying a mutual fund scheme that has a low NAV will give them the higher benefit of future growth of the scheme. So, when a New Fund Offer (NFO) hits the market, many investors rush to buy lured by the ‘Rs 10 NAV’ proposition, disregarding whether the traits of the mutual fund schemes and their envisioned financial goals and risk profile sync well.<\/p>\n\n\n\n In fact, to bust another misconception, a mutual fund NAV is not similar to the stock price of a company. Unlike stock prices, where the demand and supply influences the price, the NAV of a mutual fund is not affected by purchase and sale transactions. Likewise, NAV does not tell if the fund is available cheap or expensive. It simply denotes the current value of all securities the scheme’s portfolio holds.<\/p>\n\n\n\n Generally, funds that have been in existence for a long time have higher NAVs which suggests that they have performed well in the past. By avoiding a scheme that has a high NAV you may be penalizing it for its stellar performance record. That said, there is no assurance that it will generate good returns in the future either.<\/p>\n\n\n\n The NAV of a mutual fund is a useful tool to determine its performance, but it does not indicate the future prospects of a mutual fund scheme.<\/strong><\/p>\n\n\n\n New Fund Offers (NFOs) are generally launched at a NAV of Rs 10 per unit. So, if the old scheme and the new scheme have invested in the same companies with similar weightage, they are likely to generate similar returns. Their NAV will not have an impact on their potential in any way.<\/p>\n\n\n\n Table: NAV does not have an impact on the performance of mutual funds<\/em><\/strong><\/p>\n\n\n\n