Higher and lower NAV: What does it imply for an investor?

NAV or Net Asset Value of a mutual fund scheme that underlines the performance of a particular scheme is computed by decreasing total liabilities of a fund by the total assets held under the scheme divided by the number of outstanding shares. More precisely, NAV that reflects funds intrinsic worth moves higher or lower depending on the investments made by the fund manager as well as for how long the fund has sustained its existence in the market.

Generally speaking, new investors in a scheme shall prefer a lower NAV value as in that case investors shall realize more number of units. But, in case the portfolio of the two mutual fund schemes under consideration is the same than even though lower NAV corresponds to you being allotted more number of fund units, the overall portfolio value that is computed by multiplying NAV of the scheme with the number of units by investment in either of the schemes shall remain the same.

In any case, the most important thing is the quality of stocks in the portfolio that form part of the NAV.

So, the NAV should not be the criteria for you to select a mutual fund scheme. And, NAV of the scheme cannot be taken to be synonymous to share price and determine investment direction of the investor. Instead other factors should come to play while you decide to bet on a mutual fund scheme, including funds Performance over a similar time frame, your own risk appetite and management style adopted by the fund house among other relevant criterion.

Nonetheless, when talking about dividends (in case you have not opted for cumulative schemes), scheme at a higher NAV shall result in the realization of a lesser dividend amount for the investor as the higher NAV that correspondingly translates into lesser scheme units means lowered dividend as dividend distributor is done on face value or on unit basis and with lesser units in hand, the subscriber in a scheme whose NAV is currently high is entitled to lower dividend.

So, despite you realizing lower absolute dividend in the case when the mutual fund scheme has a higher NAV, total returns in case of the two schemes with different NAV values but having similar portfolio allocation will yield same returns.

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Debt funds: Why we should not ignore the same?

Come to think of mutual funds, there is a perception that debt funds are for institutions and most individuals park money in schemes that invest bulk of the proceeds in equities. While it's not such a bad idea, it's always a risky proposition. To hedge against a slide in the stock markets, it's best to invest some proceeds of your capital in debt mutual funds.

Often the question that occurs in the mind of investors is: I can invest in bank fixed deposit. Why a debt mutual fund? The answer is simple - if you take into account taxes, you would realise that debt mutual funds are more tax efficient.

Interest earned on a bank deposit is added to your total income and taxed accordingly. For example, if you are in the 30 per cent tax bracket, then, 30 per cent of the interest earned on a bank fixed deposit would go towards payment of taxes, lowering your yield.

In case of debt mutual funds, you could opt for dividends distribution which is tax free in the hands of the investor. However, it's important to note that a Dividend Distribution Tax of 25 per cent is to be paid by the Asset Management Company and same is obviously recover from you, reducing the dividend payout.

The best part of a debt fund is that if you hold onto it for the long term (more than 1 year) the long-term capital gains tax without indexation is 10 per cent. This is certainly beneficial, if you are parking money in fixed deposits and are in the 30 per cent and 20 per cent tax bracket.

Debt funds are relatively safe, as they park their money in government securities and extremely safe corporate bonds. So, to hedge against equity risks, you might want to consider debt funds.

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