The Hindu Business Line : High NAV not a concern

Since mutual funds are also considered for tax exemption under Section 80C this year, I invested Rs 15,000 in HDFC Long Term Advantage Fund. Later on, somebody told me that I have bought it at a very high NAV. Therefore, I would have very few units and my gains will be low. Please tell me if I have done the right thing. Should I switch to another HDFC fund with a lower NAV?

Manoj Kumar

You have already chosen a fund with a good five-year record for your tax saving investment. Do stay with it for the next three-five years for a reasonable return. Switching to another fund because it has a lower NAV would be a wrong move. It will not make any material difference to your returns.

You have been wrongly advised that a fund with a high NAV will earn you a lower return. To understand this, you need to take note of two things. One, when you buy an equity fund, you are buying into a portfolio of stocks that the fund owns, at current market prices. The NAV of a fund is nothing but the market value of its current portfolio divided by the number of units it has issued to investors.

Therefore, if a fund has a NAV of Rs 15 today, this means that the market value of the stocks in its portfolio amount to Rs 15, when you distribute it among all the outstanding units.

Ditto for a fund with a NAV of Rs 100 per unit. Whether you buy into a fund with the high NAV or one with a low NAV, you are, in a sense, buying into the prevailing stock market levels.

Which of the two funds will do better from this point will depend on the stocks that figure in each fund's portfolio and whether the manager makes the right choices over the next few years.

Therefore, a fund with a Rs 100 NAV may well do better than a fund with a Rs 15 NAV, if the former's fund manager is more adept at selecting stocks that outperform the market.

In fact, a fund with a high NAV may often be the better choice because it shows that the fund manager has earned a higher return for investors in the fund over the years. If you evaluate performance over the past two years, you will find that, funds such as HDFC Taxsaver and HDFC Long Term Advantage have managed to deliver returns that are better than many of the low NAV funds.

Second, the number of units you own in a fund is immaterial to your returns. If you invested Rs 10,000 in a fund and it grew to Rs 15,000 at the end of five years, your returns are 50 per cent. Whether the Rs 10,000 fetched you 100 units or 1,000 units really has no effect on the wealth that the fund has created for you.

Though the NAV level is irrelevant, the returns that you earn from an equity fund do depend on the time at which you enter the fund.

The returns for an investor who entered an equity fund at the 7000-Sensex level would obviously be much higher than the returns for one who enters at the 9900-level.

Therefore, tax savings should not be your prime motive for investing in an equity fund. Invest in an equity fund, only if you are comfortable with the risk that the investment carries and are convinced that stocks will build wealth over the long term.

Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859-860, Anna Salai, Chennai 600002.

Aarati Krishnan

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