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NFO Misconception

Is the strategy of buying into new funds and selling them after 100 per cent appreciation a sound one? Is there any saturation point of the NAV?
- Kersi Sevadia


I am a retired person and my wife is dependent upon me. I have no children or any other liability. I have investments spread across shares, mutual funds, post office schemes, bank fixed deposits etc. My concept of buying mutual fund is to buy reputed new funds (NFOs) at the face value, earn a 100 per cent appreciation and switch over to other funds or shares. I have read your magazine and need your opinion on following matters I noticed in your magazine. You say that investment decisions should be guided by factors other than net asset value (NAV). What are they? Some of the five-star funds have NAV of over Rs 100. Are they worth buying now? What is the saturation point of NAV? How to analyse NFOs before buying?
- Kersi Sevadia

Before we talk about your specific queries, let us point out that we think buying into new funds and keep switching upon achieving 100 per cent returns is not a sound investment strategy. Buying into new funds is like buying into unknown, which you can easily avoid by opting for well-established funds with proven worth. Secondly, by keep switching your money from one fund to another, you achieve little except inflicting your portfolio with the burden of loads and taxes. You should consider switching only in circumstances like sustained under-performance of your fund, a change in the fund objective, or a need to rebalance your asset allocation.

The most popular misconception that attracts investors towards NFOs is that they are available 'cheap' at Rs 10, which is at par. Read the answers to understand why NAVs do not matter at all, and why, therefore, NFOs offer no value over the older funds.

The amount of your investment remaining unchanged, between two funds with identical portfolios, a low NAV would mean a higher number of units held and consequently a high NAV would mean lower number of units held. But under both circumstances, the product of the number of units and the applicable NAV - which is the value of your investment - would be identical. Thus it is the stocks in a portfolio that determine returns from a fund, the value of the NAV being immaterial.

When one sells those units, the return will be the same as that of another scheme, which has performed similarly. 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. Mutual fund schemes have to be judged by their performance. And the simplest way to do this is to compare returns over similar periods. This includes returns over a longer period of time, say over the last five years, as well as over shorter durations like yearly performance. Funds that find place among the better ones in the category across different time periods are worth your money. You can also refer to Value Research Star Rating, which rewards superior long-term risk-adjusted performance.

There is no saturation point of an NAV. A fund manager keeps buying and selling stocks and whatever profits/losses he makes on those investments gets reflected in the NAV. If the fund manager continues to perform well and invest in good stocks, then NAV can keep increasing. Don't worry about the NAV of funds crossing Rs 100. It should be immaterial for your investment decision.


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