October 11, 2019

Why NAV of Mutual Funds starts with Rs.10 during NFO?

Have you wondered why the NAV of Mutual Funds starts with Rs.10 and why not with Rs.1 or Rs.100? When I searched for the same, interestingly there is no such SEBI regulation also that why a mutual fund must start with NAV of Rs.10.

NAV of Mutual Funds starts with Rs.10

What is the meaning of Mutual Fund NAV?

Before jumping into further, let us first understand the meaning of NAV. Net Asset Value or NAV is defined as the per-unit price of the mutual fund scheme.

In simple terms, NAV is the price at which you buy a mutual fund from the mutual fund company. The price will then be called NAV or Net Asset Value of that fund. The increase in NAV at previous levels indicates that the fund is making a profit, while the decrease in Net Asset Value indicates that the fund’s investment has to suffer.

Let us assume you are trying to invest Rs.1,000 and the NAV is at Rs.20 i.e each unit cost you Rs.20. Then the number of units you will get is Rs.1,000/Rs.20=50 units.

Assume that after a few days you wish to sell the invested amount and at that time the NAV is Rs.25. Then you will receive the amount as the number of units you are holding multiplied by the NAV at the time of selling i.e 50*25=Rs.1,250.

The mutual fund unit’s NAV changes daily and the reason is in the fund that calculates the NAV of a fund. The formula for NAV calculation is as follows:

NAV = (Total Assets of the Fund – Total Liabilities of the Fund) / Total Number of Units outstanding.

I hope you understood what is NAV in mutual funds.

Why NAV of Mutual Funds starts with Rs.10?

Now let us discuss why the NAV of Mutual Funds starts with Rs.10? Is there any SEBI Regulation that the NAV of the fund must start with Rs.10? When I searched for the same, then I am unable to find such regulation.

Even if you luckily find it the regulation, then my question is that why SEBI also set the NAV of fund must start with Rs.10 only and why not with Rs.1, Rs.100, Rs.1000 or Rs.20 (odd numbers)?

You may be noticed it or not. Starting NAV from the rounding number of TEN is not only in India but across the globe. They start the fund NAV from Rs.10.

Then what is the logic behind this secret number Rs.10? It is nothing but a UNCONCIOUS BIAS. Our mind is full of these unconscious biases towards particular events or situations. We tend to believe that Rs.1 is always cheap but Rs.10 is a middle number and Rs.100 or Rs.1000 a costly product. Hence, this is what the mutual fund companies started to use the NAV of Rs.10.

Unknowingly you are prone to such unconscious biases irrespective of whatever someone try to clear your such biases or beliefs.

Whatever below Rs.10 looks to us very cheap and at the same time NAV of Rs.1,000 or Rs.100 looks costly to us. Even though your fund performance in no way related to NAV.

In general, the majority of us invest less than Rs.1,00,000 a month in mutual funds. In fact, the average SIP size in India is around Rs.3,000. In such a situation, if NAV starts with Rs.100 then we tend to believe that we received lesser units.

However, if the NAV is Rs.10, we feel comfortable UNKNOWINGLY. Same way if NAV is at Rs.1, then we feel something wrong with the fund 🙂

In reality, NAV of Rs.1, Rs.10 or Rs.1000 does not matter to us. However, unknowingly we are comfortable with certain numbers.

Let me give you one more classic example of how these unconscious biasses deep routed in our minds. Whenever you go shopping, if at first, you find an item which is costliest one, then your every next search looks cheaper (unknowingly). The reason is that your mind starts to compare the price with the one which you first found.

This is how the unconscious biases deep routed in our minds. This why Bata’s price tag always ends with Rs.99, Rs.999 or Rs.1999 rather than Rs.100, Rs.1,000 or Rs.2,000.

Do remember-Your NAV in no way related to fund performance. However, we sill cross-check the NAV and tend to believe that higher NAV means the fund performed well and lower NAV means not so good.

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