Do Mutual Funds With Lower NAVs Give Better Returns
Investors often have numerous queries about investing in mutual funds, and a popular inquiry is whether mutual funds with lower NAVs provide better returns. NAV, or Net Asset Value, is an essential metric for mutual fund investors as it determines the value of each fund unit. But does a lower NAV necessarily mean better returns?
In this article, we will delve into this topic and explore whether there is a correlation between mutual funds with lower NAVs and better returns. We will also discuss the factors that affect mutual fund returns and the considerations investors should consider when choosing a mutual fund. So, let's discover whether low NAV mutual funds are the key to higher returns.
The Understand Of NAV
The Net Asset Value (NAV) of a mutual fund represents the per-unit value of the fund and is computed. One can calculate a mutual fund's Net Asset Value (NAV) by taking the quotient of the total value of the fund's assets divided by the number of outstanding units. The NAV of a mutual fund is an essential metric that investors use to track their investment performance. As the value of the assets in the fund changes over time, the NAV will also fluctuate, reflecting the fund's current value.
To calculate the NAV of a mutual fund, the total value of the fund's assets should be divided by the number of outstanding units. The formula for computing NAV can be expressed as follows:
NAV = (Value of assets - Liabilities) / Number of outstanding units
To break down the formula, the value of assets includes all the investments held by the mutual fund, such as stocks, bonds, and other securities. Liabilities refer to any outstanding debts or expenses that the fund owes. The net value of assets can be determined by deducting the liabilities from the total value of assets.
The number of outstanding units refers to the total number of shares or units issued by the mutual fund. This number will increase or decrease based on the inflow or outflow of investor money in the fund.By calculating the NAV, investors can determine the value of each mutual fund unit. The NAV is usually calculated at the end of each trading day and is published on mutual funds or financial news websites.Things that Affect the Mutual Funds
- Market conditions: The performance of the stock market or bond market can significantly affect the returns of mutual funds. Economic and geopolitical factors, such as interest rates, inflation, and political stability, can also impact market conditions.
- Expense ratio: It refers to the yearly fee imposed by the fund to cover operating expenses, such as management fees and administrative costs.
- Asset allocation: The asset allocation strategy of the mutual fund can also impact returns. Asset classes like stocks, bonds, and commodities have different risk and return profiles. Therefore, a well-diversified portfolio can help mitigate risk and enhance returns.
- Fund size: The size of the mutual fund can also impact returns. Smaller funds may have greater flexibility in making investment decisions, while more considerable funds may face liquidity issues when buying or selling assets.
Factors to consider while choosing mutual funds
- Risk tolerance: Investors should assess their risk tolerance and decide on mutual funds that align with their investment objectives. Mutual funds can range from conservative to aggressive, with different levels of risk and potential return.
- Investment goals: The investment goals of the investor should also be considered. For example, investors with a long-term investment horizon may choose mutual funds with a growth-oriented investment style. In contrast, investors with a short-term horizon may opt for conservative funds.
- Fund performance: The mutual fund's past performance can indicate its future performance. Investors should consider the history of the fund, its performance during different market conditions, and its consistency in generating returns.
- Expense ratio: The mutual fund's expense ratio should be considered, as it can impact the overall returns. Investors must always compare the expense ratios of different funds to choose the one with a reasonable cost.
- Fund size: The size of the mutual fund can impact its performance and liquidity. Investors should choose appropriately sized funds that can manage investor inflows and outflows.
Regarding mutual fund investments, investors should not solely rely on a lower NAV to provide better returns. While NAV is an essential metric to track investment performance, other factors include market conditions, expense ratio, asset allocation, and fund size. In addition, investors must assess their risk tolerance, investment goals, and the mutual fund's past performance before making investment decisions.
By considering these factors, investors can make an informed decision and choose a mutual fund that aligns with their investment plans and provides optimal returns. Remember, always do your research and choose wisely to achieve your financial goals.