We all have obsession of new things/ new items and believe that when it is
new it should be better as compared to the old ones. Same logiv applies to the
mutual funds, people feel that new funds with new ideas and lower net asset
value (NAV) are cheaper and will be better as compared to the old ones. Sometimes sales people say like ‘The NAV is just
`10’ so let’s grab it
now. As a result, investors flock to new fund offerings (NFOs) to exploit this
so called cost advantage. However the truth is that NAV is totally irrelevant and
should not even be considered when making an investment.
Let us understand more by an example.
Let’s say there are two funds have identical portfolios. One has been
around for a while and the other is a newly launched fund. As the values of
their (identical) holdings increase, the NAV will rise by the same percentage. So,
investors in both will benefit equally.
Let us understand it more through an example. Mr Ram is obsessed with new
funds and invests in a new scheme called as ABC while Mr Shayam invests in existing
mutual fund scheme named as XYZ. let’s
say the NAV of fund ABC is Rs.10 and NAV of Fund XYZ is Rs. 50. Mr. Ram has invested Rs. 10,000/- in ABC fund
while Mr Shyam has invested same amount in XYZ fund.
No. of units to be allotted = Investment Amount/ NAV per unit
So: No. of units to be allotted to Mr Ram = 10,000 / 10 = 1000 units
No. of units to be allotted to Mr Shyam = 10,000 / 50 = 200 units
Now say after six months the market goes up by 10% and since both the
schemes have similar portfolio so the value of each scheme also goes up by 10% accordingly
the NAV of these funds will rise to Rs. 11 and Rs. 55, respectively. Lets calculate the portfolio value of Mr Ram
and Shyam
Portfolio Value of Mr. Ram (after
six months) = 11 X 1000 = 11,000/-
Portfolio Value of Mr. Shyam (after
six months) = 55 X 200 = 11,000/-
So, it might appear that one has just risen by a rupee while the other by Rs.
5, but, in reality, they have both shown a 10 per cent rise. Of course, the
number of units held would differ. A low NAV would imply a higher number of
units and a high NAV would indicate a lower number of units. However The ‘cost’ of a scheme in terms of its
NAV has nothing to do with returns. What you want to buy in a scheme is its performance,
not its NAV. The only instance where a higher NAV may adversely affect you is
where a dividend has to be received. This happens because a scheme with a
higher NAV will result in a fewer number of units and as dividends are paid out
on face value, a higher NAV will result in lower absolute dividends due to the smaller
number of units. But even here, total returns will remain the same. So, from
whichever angle we see it, NAV makes no difference to returns. Mutual-fund schemes
have to be judged on their performance. And the simplest way to do so is to compare
returns over similar periods. The confusion over NAV arises simply because
investors view a fund’s NAV like a stock’s price which is absolutely not a
truth. The current price of a stock could be much lower or higher than its
actual value. But the NAV just reflects the current value of the portfolio as
it is.
There are certain advantages of old/existing schemes like:
- · There is performance history of the old scheme; although past performance may not repeat in future still it gives an idea about the mutual fund and its fund managers track record.
- · We get to know what all securities/stocks are in that scheme whereas in case of new scheme the fund will start buying the securities after closing of the NFO and we have no idea what securities and how much quantity the fund manager would be buying.
- · Existing schemes can be compared with the other similar schemes available in the market and accordingly get the idea about their performance vis-à-vis others while for new schemes it’s all new without any benchmarks to know how will they perform as compared to thers.
Next time when we are evaluating a fund we should take a good look at the
portfolio and returns over various time periods and also vis-à-vis other
schemes.
Always Remember, the returns/performance is determined by the stocks that
the fund manager has invested in. The value of the NAV is immaterial.
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