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