New Fund OR Existing NAV Fund?

April 18, 2018

As an investor, we are looking at maximizing our returns whilst mitigating the risk of losses. So when we are presented identical looking schemes, one which is a new fund offer  at a price of Rs 10/- unit and another existing fund which has existed for over say 10 years and whose NAV (Net Asset Value) is Rs 52/- unit, our choice invariably goes to the new fund offer because of the following rationale :

  1. The New Fund at Rs 10/- appears cheaper than the existing fund’s NAV at Rs 52/-, by almost 80%

  2. The risk of the NAV falling from Rs 10/- seems smaller and less risky when compared to the risk of the NAV at Rs 52/-, falling.

 

 

However, is it the truth or is this a perception?

 

Assuming both are open ended funds which invest in the same markets, it is likely that a 20% increase in the market would render the Rs 10/- NAV to move to Rs 12. Quite similarly, so would the existing fund at Rs 52/- go up to Rs 62/-. As such, the existing NAV is unlikely to be any different in performance. While a lower NAV would give more units to the purchaser, a higher NAV would provide the investor a greater jump when the market moves up thereby compensating for the lower number of units i.e. if the performance is identical between a lower NAV and higher NAV fund, the returns from both the schemes to the investor would be the same.  In fact, a higher NAV indicates and provides an insight into how the fund manager has managed the fund and therefore, is a valuable insight to the investor in choosing the fund.

 

Hence the next time someone tells you to invest because the NAV is Rs 10/-, think twice…

 

Is the TEN Mightier than the existing fund NAV?

 

 

 

 

 

 

 

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