Keep a Track Record of your Funds

NFOs with low NAV may be cheap but not necessarily a better investment option.

Call it the low denomination phenomenon – new fund offers (NFOs) in equity mutual funds (MFs) remain an attractive option for investors as they are able to pick up a lot more units at cheaper rates. Mutual funds offer the following benefits to their participants.

Diversification: The pool of funds collected in a mutual fund scheme is invested in scores of securities. Individual investors can scarcely achieve such diversification on their own. Remember that a diversified portfolio reduces risk.

Professional Management: When you invest in a mutual fund scheme, you are relieved of the chores and tensions associated with managing investments on your own. Mutual funds are managed by professionals who decide what to buy and sell, and when. Their decisions are supposedly guided by investment research and analysis. Individual investors may lack such expertise and / or cannot devote similar time and attention to their portfolio.

Liquidity: Investment in mutual funds is generally fairly liquid. Units or shares of mutual funds can be traded in the secondary market or sold back at the notified repurchase prices.

Assured Allotment: Investors are assured of firm allotment (typically it is total, sometimes it is partial) when they apply for the units or shares of mutual funds. Of course, under the tax saving schemes, there are limits on investment.
Mutual funds offer the following benefits to their participants:

Diversification: The pool of funds collected in a mutual fund scheme is invested in scores of securities. Individual investors can scarcely achieve such diversification on their own. Remember that a diversified portfolio reduces risk.

While average retail investors chase initial public offers for the gains stocks give on the listing day, NFOs are seen as the best opportunity to pick up equity MF units at a cheap price. But is a fund with low net asset value (NAV) a better investment option? Not necessarily say investment consultants. Returns depend on how the portfolio is managed. Investments should be made irrespective of what the NAV is and the track record (of the fund) is more important.

The idea that a fund with low NAV is cheap and hence a better investment option is one of the biggest mistakes that investors make says an observer. The NAV is immaterial, a higher NAV doesn’t necessarily mean that the fund is overvalued . It doesn’t matter whether the NAV is Rs 10 or Rs 1000. A fund with higher NAV could end up having the same proportion of stocks as that of a MFs with a lower value. The NAV makes no differences to returns. MFs should be judged on their performances. And the simplest way to do this is to compare returns over similar periods.

Retail investors should choose equity MFs with a track record of at least three to five years say advisors. This way the investor can easily determine how the fund has performed in different market conditions. One has to wait for the fund to become consistent and then only make investments. Only then the probability of entering a better performing fund would become higher, he says. If a fund has done consistently well for several years it is likely to fare better over the long term say observers. But one shouldn’t look into the distant history as this may not hold much relevance in the current context they say.

A higher NAV may have an impact when dividends are given. Since dividends are paid on the face value of the fund, a scheme with a higher NAV would bring in lower absolute dividends as the number of units is less. A 50 % dividend would result in the investor getting Rs 5 for every unit held. Higher number of units means more dividends. But some consultants believe that a fund with a longer track record would be in better positions to pay dividends. Existing funds would have more realized gains (profits) than new funds. Also, the capability of the fund with a long track record to pay dividends would be much higher.

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