Demystifying the NAV

For a large section of mutual fund investors the Net Asset Value (NAV) is the deciding criterion for investing. Any fund with a low NAV is perceived as a smart investment opportunity, while a high NAV is seen as forbidden territory. So what is the NAV and is this the right investment parameter. The NAV is a factor of the assets' market price and number of units issued. The following illustration explains the NAV computation.

Fund X's NAV: Before and After

Date	Corpus (Rs)	No. of Units	NAV (Rs)
21-Sep-03	50,000	5,000	10
21-Oct-03	60,000	5,000	12

It is commonly believed that the later NAV (Rs 12) is more "expensive" vis-à-vis the earlier one (Rs 10). Investors tend to draw parallels between share prices and NAVs of mutual fund units leading to this misconception. Stock prices are different from NAVs and a comparison between the two is fundamentally flawed on the following grounds

Stocks have a book value which represents its intrinsic worth. The book value depends on the net worth and number of shares issued. The market value on the other hand is the price at which shares are traded. Market sentiments and expectations are also factored in the market value. In other words, in a stock, the book value is divorced from the market value.

If a stock's book value is Rs 120 and is currently being traded at Rs 135, then the stock can be termed as an expensive one. On the other hand the NAV is the value of the scheme's assets after adjusting fund management expenses, marketing etc. Hence, a higher NAV implies higher asset value- so the book value is the market value. Therefore, when equity markets run up, most (if not all) equity mutual funds would also witness an appreciation in their NAVs, as equity funds invest in stocks. No one can say that the NAV has appreciated because of market sentiment. The NAV has appreciated because the underlying asset (stocks) has appreciated.

NAV Growth

Schemes	NAVs on		Growth
	Jan 1, 2003	Oct 21, 2003
FRANKLIN INDIA BLUECHIP (G)	23.55	38.97	65.5%
J M EQUITY (G)	7.44	12.04	61.8%
PRUICICI GROWTH (G)	19.86	30.23	52.2%
HDFC TOP 200 (G)	21.70	31.57	45.5%
K 30 (D)	12.10	16.56	36.9%

The above table throws up a very interesting picture. During the period under consideration the best growths have been recorded by the funds with the "lowest" (J M Equity- Rs 7.44) and the "highest" (Franklin India Bluechip- Rs 23.55) NAVs respectively. On the other hand the least growth has been recorded by K 30 (D), a fund with a low NAV. Clearly the data suggests that there is no correlation between the NAV size and the returns.

While selecting a fund, the NAV shouldn't be the criteria. A low NAV need not mean that it's a good buy. A NAV could languish for a host of reasons including inept fund management, inadequate diversification, etc.

As an investor what you need to consider is the fund, its portfolio and the style of management. The NAV does not matter!