NAV myth

A friend showed me two funds last week and asked which was the better buy. One had a NAV of Rs 10. The other Rs 480. He was leaning hard toward the Rs 10 one. It felt cheap. More room to run.

I asked him what he thought the Rs 10 was actually the price of.

Here is the math that settled it. Put Rs 10000 into the Rs 10 fund and you get 1000 units. Put the same Rs 10000 into the Rs 500 fund and you get 20 units. Now say both funds hold the exact same portfolio and it rises 10 pct. The first is worth Rs 11000. The second is worth Rs 11000. To the rupee.

A NAV is not a share price. It is today's value of one unit of the pot. A low NAV does not buy you more, it slices the same money into more units. You own the same rupees of the same holdings either way. Rs 10 is not a discount. Rs 500 is not expensive.

And the cheap sticker hides the thing that actually matters. A new fund priced at Rs 10 has no track record. No drawdown you have watched it sit through. No rule you have seen behave through a bad year. An older fund at a high NAV is not dearer, it has simply been compounding long enough to hand you years of evidence. That evidence is the part worth paying attention to.

The Rs 10 sticker is the easiest thing to see and the least useful. Buy the kitchen's record, not the price of the slice.

If you want to weigh two funds on what they hold and how they have behaved instead of the number on the front: