Mutual funds: Making sense of the new highs in NAVs

Investors have been watching their equity investments rise along with the market. This includes their equity-oriented mutual fund schemes and it has led to a situation where the value of several of the schemes is touching highs with each passing day.

However, while this might seem to be very good news, for a lot of investors their individual situation makes the position quite different. This might not result in the same sense of happiness and gains and this need to be considered so that the entire position is understood in the right perspective.

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New highs

The exact nature of the developments in the mutual fund schemes needs to be considered because there are specific conditions attached to that particular development. The run up in the markets have led to several Net Asset Values (NAV) of the fund heading toward their 52-week highs.

This means that the NAV are the highest over the last 52 weeks and if the units had been bought at any time during this time period then the investor would experience that the prices that they see today are the highest. This is different from a lifetime high where the prices would be the highest ever over the entire life of the scheme. Since there is a specific time period mentioned for the highs this is valid only for that particular time.

This ensures that the situation is put into context for the investors who are looking at the values and prices around them.

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Higher purchase

One of the main reasons why such a situation fails to impress a lot of investors is due to the fact that the high price that is being witnessed today has no major impact for them. The investors are still witnessing a fall in the value of the investment as compared to their cost price.

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This has happened because of the fact that the purchase was made either when the markets were even higher than this level or that there has been a sharp fall in the value of their scheme and this has not been able to recover the desired ground.

For example consider the case of an investor who got into an equity scheme when the NAV was Rs 17.5. After this level the markets crashed and due to this factor the NAV went down to Rs 6.14.

After that the sharp and dizzy climb has led to the NAV recovering to Rs 13.2 and this still represents the highest value in the last 12 months as well as the fact that it is more than double of the low that was recorded. But all this is no consolation for the investor who has still some way to go before his cost actually arrives and he is able to make a profit on the investment. The prices will have to rise another 32 per cent from the current level in order that the original cost is reached.

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Even today if an investor considers the value of various schemes that are present then data available with valueresearchonline shows that while the average gain in equity diversified schemes as on September 30 was around 33 per cent there were schemes with a negative rate of return even over the past one year.

The worst of them actually had a negative 27 per cent return, which meant that the investor actually lost value significantly over this time period. While there were a total of 5 diversified equity schemes that have a negative return over the one-year period, another 5 had a positive return of less than 10 per cent. Even tax planning equity-linked savings scheme and banking sector funds had schemes with negative returns over the past one-year.

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Dividend issue

Another reason why the investor is actually not happy with the situation is due to the fact that there is a small mistake that they are making in the process of making the investment comparisons.

There are a lot of investors who have opted for the dividend option in their schemes. There is a separate way in which the dividend schemes have to be seen for the calculation of the returns and hence this is important. The payout of the dividend will result in the reduction in the NAV of the scheme and this amount is actually received by the individual so this has to be added into the overall calculation. If this is done, then even if there is a small negative position or an actual positive position then this might look like a loss for the investor and they would be quite unhappy with the situation, as they are not witnessing any gains for their investment.

This kind of working has to be considered not only for the current years figure but right from the time that the investment was made because this is still a return coming in for the investor.

For example if the investment was bought two years ago at a NAV of Rs 22 and after that there was a dividend of 40 per cent last year and 15 per cent this year then Rs 5.5 has already been received as divided. If the current NAV stands at Rs 18 then the investor might think there is a loss being borne by them, but in reality they are marginally ahead on the returns chart.

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Source : www.valueresearchonline.com

Arnav Pandya is a Chartered Accountant and a management graduate from IIM Bangalore with a specialisation in Finance. He is also a Certified Financial Planner with experience of over a decade in the field of personal finance.

The views expressed in the article are the author's and not of Sify.com.

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