I understand the intuitive appeal. It feels logical. If a fund’s share price is $8 and another is $80, the $8 fund seems more “affordable.” You could buy more shares, and if it goes up, you’d make more money, right? This is the same psychology that draws people to penny stocks. It feels like a bargain basement. But in the world of mutual funds, this intuition is not just wrong; it is dangerously misleading.
As someone who has analyzed fund structures for decades, I can tell you that a mutual fund’s NAV per share is perhaps the most meaningless data point for an investor. Focusing on it is like choosing a car based on the number of digits on the odometer instead of the engine, the condition, or the mileage. Today, I will explain why this is the case and what you should be focusing on instead.
Table of Contents
What Exactly Is Net Asset Value (NAV)?
First, let’s define our terms with precision. The NAV is the per-share market value of a mutual fund.
It is calculated daily after the markets close using this simple formula:
\text{NAV} = \frac{\text{Total Assets} - \text{Total Liabilities}}{\text{Total Shares Outstanding}}- Total Assets: The sum of the total market value of all securities (stocks, bonds, etc.) in the fund’s portfolio, plus any cash and accrued income.
- Total Liabilities: The fund’s accrued expenses, management fees, and other debts.
- Total Shares Outstanding: The total number of shares that the fund has issued to all of its investors.
Example: If a fund owns securities worth \text{\$100 million}, has cash of \text{\$5 million}, and has accrued expenses of \text{\$5 million}, its total net assets are \text{\$100 million}. If it has 10 million shares outstanding, the NAV is:
\text{NAV} = \frac{\text{\$100 million}}{10\ \text{million shares}} = \text{\$10.00 per share}The key takeaway is that the NAV is simply a result of the fund’s size (assets) and the number of shares it has split itself into. It is an accounting value, not an indicator of quality, value, or potential.
Why a Low NAV Is Not a “Discount” or a “Bargain”
This is the most critical concept to grasp. A mutual fund is not a stock.
- A Stock’s Share Price: Can be overvalued or undervalued based on future earnings potential, market sentiment, and analyst projections. A $50 stock might be cheap, and a $10 stock might be expensive based on the company’s prospects.
- A Mutual Fund’s NAV: Is a direct, precise reflection of the current value of the assets it holds. There is no “undervalued” NAV. A fund with an NAV of $8 is not “cheaper” than a fund with an NAV of $80. It is just a different number.
Let’s illustrate this with a definitive example. Imagine two identical S&P 500 index funds. They hold the exact same stocks in the exact same proportions.
- Fund A: Has been around longer and started with a lower number of shares. Its NAV is $80.
- Fund B: Is newer or split its shares. Its NAV is $8.
You invest \text{\$8,000} in each.
- In Fund A, you own \text{\$8,000} / \text{\$80} = 100\ \text{shares}.
- In Fund B, you own \text{\$8,000} / \text{\$8} = 1,000\ \text{shares}.
Now, assume the S&P 500 goes up 10% the next day.
- The assets in both funds increase in value by 10%.
- Fund A’s NAV rises 10% to \text{\$88}. Your investment is now worth 100 \times \text{\$88} = \text{\$8,800}.
- Fund B’s NAV rises 10% to \text{\$8.80}. Your investment is now worth 1,000 \times \text{\$8.80} = \text{\$8,800}.
Your return is exactly identical: \text{\$800} or 10\%. The number of shares you own and the price of each share are irrelevant. What matters is the percentage change in the value of the underlying assets.
What a Low NAV Might Actually Signal
While a low NAV itself is not a useful selection criterion, the reasons behind a low NAV can sometimes be a red flag.
- Poor Performance: A fund that has suffered significant, sustained losses will see its NAV decline. A $10 NAV might be the result of a fund that has fallen from $20. This isn’t a bargain; it’s a track record of failure. You are buying into a fund that has been destroying value.
- High Fees: All else being equal, a fund with a high expense ratio will see its NAV grow more slowly than a low-cost fund tracking the same index. The constant drag of fees eats away at the NAV over time.
- Distributions: When a fund makes a capital gains or dividend distribution, the NAV drops by the amount of the distribution per share. This is not a loss! If you receive a \text{\$1} distribution on a fund with a \text{\$10} NAV, the NAV drops to \text{\$9}, but you have the \text{\$1} in cash (or more shares if you reinvest). Your total wealth remains unchanged.
What You Should Focus on Instead of NAV
I would never, ever screen for funds based on NAV. Instead, my analysis for any fund—whether its NAV is $5 or $500—focuses on these factors:
| Factor | Why It Matters Infinitely More Than NAV |
|---|---|
| Expense Ratio | This is the annual fee you pay. It is the single best predictor of future performance relative to peers. A low-cost fund will always have an advantage over a high-cost fund. |
| Performance vs. Benchmark | Don’t look at raw returns. Compare the fund’s returns to its appropriate benchmark index over 5+ years. Did it actually achieve its goal? |
| Risk-Adjusted Returns | Metrics like the Sharpe Ratio tell you how much return you are getting for each unit of risk taken. A smooth ride is better than a rollercoaster. |
| Manager Tenure & Strategy | Has the manager who built the track record still there? Is the strategy consistent and understandable? |
| Tax Efficiency | What is the fund’s turnover ratio? High turnover can lead to capital gains distributions, creating a tax bill for you. |
| Overall Fit | Does this fund fill a specific, deliberate role in your broader, diversified portfolio aligned with your goals? |
Conclusion: The Price is a Distraction
The pursuit of low-NAV funds is a financial mirage. It tricks you into focusing on a completely irrelevant number while ignoring the factors that truly determine your investment success: costs, strategy, and consistent management.
Your goal is not to own the most shares. Your goal is to own the most value. A single share of a well-managed, low-cost fund with an NAV of $200 is infinitely more valuable than a thousand shares of a poorly managed, high-cost fund with an NAV of $1.
Stop looking at the share price. Start looking at the underlying engine. Allocate your capital based on the quality of the fund’s holdings and management, not the arbitrary result of an accounting calculation. This shift in focus is a fundamental step toward becoming a sophisticated, successful investor.
