NFO do not come cheap

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Does Rs 10 = Rs 100
Yes or No, read and find out...

Many investors get lured by mutual fund NFOs only because they think they can buy units cheap - for just 'Rs. 10'. While buying an asset at a low price is a good idea, it may not necessarily work while choosing a mutual fund. Why?

The performance of mutual funds is driven by the underlying securities in the fund and not the NAV at which the fund is available. One of the most common reasons why people prefer to invest in a fund with a low NAV is because they think the potential for growth in such a fund will be higher than funds that have a higher NAV. The following example illustrates that this is just another myth.

Let's assume there are two funds - An 'expensive fund' with an initial NAV of Rs. 100 and a 'cheap fund' with an initial NAV of Rs. 10. Let us also assume that both the funds have identical portfolios and that an investor invests the exact amount of Rs. 10,000 in both the funds. The only difference is that the investor gets 100 units of the expensive fund and 1000 units of the cheap one.

Since both the funds have identical portfolios, let's assume that over the next 30 days, both funds appreciate by 10% each. Thus the NAV of 'expensive fund' goes from Rs. 100 to Rs. 110 and the NAV of 'cheap fund' appreciates from Rs. 10 to Rs. 11. The gains in both cases are identical after 30 days.

Old Fund New Fund

NAV on Day 0 100 10

Investment amount 10,000 10,000

Units allotted 100 1000

% change in NAV
after 30 days 10% 10%

NAV on Day 30 110 11

Value of invested amount after 30 days 11,000 11,000

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