Investing at highest is challenging when we all have been taught to buy low and sell high. But when markets are not in a mood to regain breath and upwards journey continues, should one make investments at 52 weeks high NAV? This debate Low NAV Vs High NAV has always confused the stable investors. Here is an assurance write –up, that you are on right track.
Investing in markets is about knowledge and discipline. Knowledge answers the ‘How To’ of investing. Discipline answers the ‘Why To’ of investing. Knowledge is needed to understand the mechanics of the markets. Discipline is needed to let you use that ‘mechanics’ gainfully while overriding your fear and greed.
Knowing about NAV is knowledge. It answers how you are going to invest.
Most of the equity funds reached all-time highs In the current market rally except for sector funds. In fact, this happened in May 2017. So if you were an MF investor in May 2017, you had a huge chance that your investments were already facing a high NAV.
Despite the NAV being at its peak, it is interesting to note that the net inflow in equity and ELSS schemes has seen an upward trend over the time, which means investors are showing confidence in the Indian growth story.
As per Association of Mutual Funds in India (AMFI), Equity funds (including ELSS) witnessed net inflows of Rs. 30,658 crore in Aug 2017, an all-time high figure to date.
Nov 2017 also marks the 17th straight month of net inflows into the equity category. This exceptional performance can be attributed to the overall equity markets, which reached an all-time high in May 2017, and constant inflow of investments through the SIP mode.
52 Week High Low NAV
“Buy Low Sell High” is a famous saying for the stock market, which means investors should buy stocks when their prices are low and sell them when prices go up.
But does this hold true in all cases and for all investments? Mutual funds are a means of investing in various asset classes and offer potential to give good returns.
The per unit market value of a mutual fund is its NAV or Net Asset Value. Now, the question is what does one do if the NAV reaches a lifetime? Before we answer the question, let’s first decode NAV.
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NAV is the fund’s per unit market value. It is the price at which investors buy mutual fund units from the asset management company or sell it back to the fund house.
The NAV of a fund is calculated by the asset management company as:
Mutual Fund NAV = (Total Assets – Total Liabilities)/Total number of shares or units
For example, a mutual fund has assets in stocks and other investments to the value of Rs. 100,000 and I liabilities worth Rs. 20,000. Assuming the mutual fund has issued 10,000 units, then its NAV would be:
NAV = (100,000 – 20,000)/ 10,000 = Rs. 8 per unit
What does the scheme NAV imply?
NAV is a key indicator of the market value of per unit of a mutual fund on a given day. It is the price per unit of the mutual fund. For example, if NAV of a scheme is Rs 10, it means that an investor can buy one unit of that mutual fund at this price.
Factors influencing NAV
Change in the value of the underlying stocks of the investment changes the value of NAV. if the value of the holdings rises or falls this is reflected in the daily NAV. So a highest NAV means the scheme assets value have crossed a never achieved valuation.
A change in the investment strategy of the fund could change the expenses incurred by the mutual fund. Hence, this would alter the NAV of the scheme in both short and long run.
Similarly, an increase or decrease in the number of unitholders can alter the NAV.
Low NAV Vs High NAV- The NAV myths
2 Types of NAV Myths
Myth related to low NAV – Most investors prefer to buy funds with low NAV as they perceive this would give them the opportunity to purchase a higher number of units and in the long run more units wilt fetch them a higher return.
A recent example when investors bought 3500 Cr worth units at Rs 10 of new scheme from HDFC Mutual Fund, which will invest in housing projects. HDFC has an ongoing open-ended fund called HDFC Infrastructure Fund at NAV 21.66 as on 01 Dec 2017. But instead of investing in a fund with the track, many investors have put in money at stake as it was Rs 10 Vs Rs 21.66.
Myth related to high NAV – investors perceive that a mutual fund with high NAV is likely to lose its potential and might not be much lucrative.
Now, does that mean if an investor finds that the mutual fund has reached the current all-time high NAV of the fund, he/she should opt to liquidate the fund?
One must know that mutual funds are a portfolio of stocks, which are chosen by an experienced fund manager who has well-thought figures for entering and exiting stocks. As soon as a particular stock has met its targets, the fund manager sells the stock and buys newer ones. He is not concerned with the NAV number.
So hope you now understand that NAV & Your Returns are separate things otherwise:
- Why did investors make returns in June to Nov 2017?
- Record amount of new money has entered the Mutual Funds schemes in 2017- Why?
- 60000 new folios opening every month? What could be the reason other than good returns?
NAV has no relationship with returns or returns potential of the scheme. It is just a number, a rate to know what is the worth of one unit that an investor holds in a particular scheme.
Thus, unlike stock markets, investors should not read too much into the NAV of the fund. Lifetime high NAV is not a signal to exit the fund. The investor should make changes only to align it with the overall goals.
So be free from Low NAV Vs High NAV clutter and invest freely.
Share if you still feel NAV has a bearing on your returns. I will again make an attempt to resolve this epic fight of Low NAV Vs High NAV. Share this article with your family and friends to benefit them.