Unlocking the Potential of Low NAV Mutual Funds: A Guide to Investing for Small Investors

April 4, 2023

533

Table of Contents

Low NAV Mutual Funds: An Introduction

Mutual funds are investment instruments that pool money from multiple investors to buy a diversified portfolio of stocks, bonds, or other securities. One of the key features of mutual funds is the Net Asset Value (NAV), which represents the per-unit value of the fund’s assets minus its liabilities. A mutual fund with a low NAV can be an attractive investment option for investors who want to start small or have limited resources.

What are Low NAV Mutual Funds?

Low NAV mutual funds are funds that have a lower per-unit value than other mutual funds. NAV is calculated by dividing the total value of the fund’s assets by the total number of units outstanding. For example, a mutual fund with a NAV of $10 has a per-unit value of $10.

Low NAV mutual funds can be attractive to investors who want to start investing with small amounts of money. These funds may also be appropriate for investors who want to diversify their portfolio with a lower initial investment.

Advantages of Low NAV Mutual Funds

Accessibility: Low NAV mutual funds are more accessible to investors with limited resources, as they can invest in small amounts without having to pay high upfront fees or commissions.
Diversification: Low NAV mutual funds can provide investors with access to a diversified portfolio of securities, which can help mitigate risk.
Long-term growth potential: Low NAV mutual funds can offer investors long-term growth potential, as they can benefit from the growth of the underlying securities in the fund.
Liquidity: Low NAV mutual funds are generally more liquid than individual stocks or bonds, as investors can buy or sell their shares at any time.

Disadvantages of Low NAV Mutual Funds

Lower returns: Low NAV mutual funds may offer lower returns than funds with a higher NAV, as the fund may invest in securities with a lower potential return.
Higher expense ratios: Low NAV mutual funds may have higher expense ratios than funds with a higher NAV, as the fixed costs of running the fund are spread across fewer units.
Lower diversification: Low NAV mutual funds may have a lower level of diversification than funds with a higher NAV, as the fund may have limited resources to invest in a wider range of securities.
Market volatility: Low NAV mutual funds may be more susceptible to market volatility, as the fund may have a smaller asset base to absorb market fluctuations.

How to choose Low NAV Mutual Funds?

When choosing low NAV mutual funds, there are a few factors that investors should consider:

Investment objective: Investors should consider their investment objectives, such as growth or income, and choose a low NAV mutual fund that aligns with their goals.
Fund performance: Investors should look at the historical performance of the fund, including the fund’s returns and volatility, to determine if it is a suitable investment.
Expense ratio: Investors should consider the expense ratio of the fund, which includes the fees and other costs associated with managing the fund. Lower expense ratios generally mean more money is available to invest in the underlying securities.
Fund manager: Investors should look at the experience and track record of the fund manager, as this can impact the fund’s performance.
Asset allocation: Investors should review the fund’s asset allocation, including the types of securities and sectors in which the fund invests, to determine if it aligns with their investment objectives.

Examples of Low NAV Mutual Funds

Vanguard 500 Index Fund Investor Shares (VFINX): This fund seeks to track the performance of the S&P 500 Index and has a low minimum investment of $3,000. As of March 2023, the fund had a NAV of $394.23.
T. Rowe Price Equity Income Fund (PRFDX): This fund seeks to provide a combination of current income and long-term capital appreciation through investments in dividend-paying stocks. The minimum investment is $2,500, and as of March 2023, the fund had a NAV of $34.87.
Fidelity Low-Priced Stock Fund (FLPSX): This fund invests in companies with stock prices that are lower than average and has a minimum investment of $2,500. As of March 2023, the fund had a NAV of $41.18.

Conclusion

Low NAV mutual funds can be a suitable investment option for investors with limited resources or those who want to start small. However, investors should carefully consider the advantages and disadvantages of low NAV mutual funds and evaluate their investment objectives, fund performance, expense ratio, fund manager, and asset allocation before making an investment. It is also important to note that past performance is not a guarantee of future results, and investors should conduct their due diligence and seek professional financial advice before investing.

Read more useful content:

Frequently Asked Questions (FAQs)

What is a low NAV mutual fund?
A low NAV mutual fund is a fund with a per-unit value that is lower than other mutual funds. NAV represents the total value of the fund’s assets divided by the total number of units outstanding.

What are the advantages of investing in a low NAV mutual fund?
Some of the advantages of investing in a low NAV mutual fund include accessibility, diversification, long-term growth potential, and liquidity.

Are low NAV mutual funds more risky than other funds?
Low NAV mutual funds may be more susceptible to market volatility, as the fund may have a smaller asset base to absorb market fluctuations. However, this does not necessarily mean they are riskier than other funds.

How do I choose a low NAV mutual fund?
When choosing a low NAV mutual fund, investors should consider their investment objectives, fund performance, expense ratio, fund manager, and asset allocation.

Can I invest in a low NAV mutual fund with a small amount of money?
Yes, low NAV mutual funds can be an attractive investment option for investors who want to start investing with small amounts of money.

Are low NAV mutual funds suitable for long-term investment?
Yes, low NAV mutual funds can offer long-term growth potential, as investors can benefit from the growth of the underlying securities in the fund.

How are low NAV mutual funds different from high NAV mutual funds?
Low NAV mutual funds have a lower per-unit value than high NAV mutual funds. However, this does not necessarily mean they are riskier or offer lower returns.

What is the expense ratio of a mutual fund?
The expense ratio of a mutual fund includes the fees and other costs associated with managing the fund. Lower expense ratios generally mean more money is available to invest in the underlying securities.

Can I sell my shares in a low NAV mutual fund at any time?
Yes, low NAV mutual funds are generally more liquid than individual stocks or bonds, as investors can buy or sell their shares at any time.

Are low NAV mutual funds appropriate for all investors?
No, low NAV mutual funds may not be appropriate for all investors. Investors should carefully consider their investment objectives, risk tolerance, and financial situation before investing in any mutual fund. It is also important to conduct due diligence and seek professional financial advice.