First of all, how do you describe the unit price or NAV(Net Asset Value) of mutual funds? Investopedia says “In the context of mutual funds, Net Asset Value per share is computed once a day based on the closing market prices of the securities in the fund’s portfolio.”. Indeed, the unit price or NAV will reflect the real or intrinsic values of each fund’s portfolio. In other words, we can say that unit price of funds will reflect how much each fund worths.
Sometime, the investors might think that a mutual fund with higher unit price is too expensive and may be “overvalued”. Therefore, they tend to look for or buy those funds with lower unit price and hope that such fund’s unit price can later rise up to a level that had been achieved right now by those funds with higher unit prices. However, if you’ve already get the meaning delivered from the 1st paragraph, then you must know that the concepts of “undervalued” and “overvalued” used for a particular share in stocks market should never be applied in unit trusts or mutual funds. Again, while an individual share can be undervalued or overvalued; such situation is quite impossible to happen in unit trusts. This is simply because a fund with a higher unit price could also holding a basket of undervalued stocks in it’s portfolio while the fund with lower NAV could be invested in a basket of fully or even over valued shares.
During the bull market period, assume that an equity fund with NAV = $1.00 before had raised up to $1.50. Mean while, another fund with initially lower unit price, says NAV = $0.50 might now reached $0.75. Finally, both funds will bring investors the same return rates i.e. 50%. Hence, the unit price shouldn’t be a main concern that determines which funds to be picked.
In fact, during a bull market period, there will be many existing funds performs well and generate an attractive returns and hence their NAVs will go high and even higher. At the same time, there must be a lot of new equity funds being launched during this period to attract the investors. One of the main reason that made the fund institutions to launch a series of new funds during such period is simply because that is a golden period for them to make their businesses.At this period, everyone is “feeling good” and optimistic over their future. Therefore, the businesses are much easier to be dealed during this period.
Apart from this, the unit price of these newly launched funds must be relatively much lower than the existing funds those had been rallying during the bull period. Moreover, the fund institutions would also offer free units or discount in the selling price to those who invested in these new funds. This might bring an illusion to the people that now is a “golden chance” for them to invest in these new funds with such lower unit price.
Anyway, there must always be a bear awaiting for us after the bull rallies too high and long. Therefore, most of the equity funds will now start to move towards lower unit prices in a downtrend market. To make matter worse, a series of redemptions(especially those with huge amounts) that would occur during such period will cause the unit prices of funds to go even lower. As a result, those equity funds in which have just been launched during last bull period will now suffer the most and their unit price will move from the lower to even lower. All in all, when you start looking for any fund to be invested in your future, unit price doesn’t matter.
