of liquidating your mutual fund to buy the attractive
new fund offer at par? Hold on, says Sanjay Matai, who
NAV-igates through the misinformation about NFO offers.
deluge in Mumbai is long gone and forgotten, but there's
no sign of any abatement in the flood of new fund offers
NFOs, earlier called IPOs from mutual funds.
New schemes with fancy names are being launched every
other day to lure investors. The reason, most people would
say is, of course, the booming stock market the
periodic downturns notwithstanding.
fact of the matter is that this is not quite true. One
can take the same advantage of the booming stock markets
through existing schemes. Then why this confusion over
new schemes, which are no different from the scores of
reason is the misconception in the average investor's
mind that an NFO at a net asset value (NAV) of Rs10 is
'cheaper' than existing schemes, whose NAVs would be much
higher. This fallacy is due to the fact that investors
perceive the NAV of a mutual fund (MF) as similar to the
price of equity shares. Nothing could be farther from
MF's NAV is the sum total of the market value of all the
shares held in the portfolio, including cash and excluding
the liabilities, divided by the total number of units
outstanding. This means that the NAV of a mutual fund
unit is nothing but its 'book value'.
price of an equity share, on the other hand, is an amalgamation
of the company's fundamentals, the demand-supply scenario,
its public perception, etc. In most cases, this market
price is hugely different from the book value of the share.
There is no concept of a market price for an MF unit.
case of equity, the number of shares is fixed equal
to the issued capital. But in case of MFs, the number
of units changes every day it increases with every
purchase and decreases with every redemption. This is
another reason why NAVs and equity prices are not comparable
when you buy an MF unit at its NAV, you are paying the
book value. Whatever be the NAV Rs10 or Rs100
the returns in percentage terms will be exactly the same.
us assume that a diversified NFO fund 'A' is being launched
at Rs10. There is an existing fund, 'B', with the same
portfolio, but its NAV is Rs100. If you invest Rs100,000
in each of the funds, you will receive 10,000 units in
Fund A and 1,000 units in Fund B.
year from purchase, both the funds would have grown equally,
as their portfolios are exactly the same. Let us say this
growth was 40 per cent. Accordingly, the NAV of Fund A
would now be Rs14 and that of Fund B would be Rs140. The
value of your investment in Fund A would be 1000 units
x Rs14 = Rs140,000. In Fund B, it would be 100 units x
Rs140 = Rs 140,000 exactly the same! This shows
that the NAV is immaterial to the returns.
is important to appreciate that the future returns of
an existing portfolio (with a higher NAV) will be the
same as an identical new portfolio (with a Rs10 NAV).
let us assume that Fund X, launched in February 2005,
raised Rs10 crore and allotted 100 lakh units of Rs10
each. This initial corpus was invested equally
Rs2.5 crore each in Nalco, Cipla, TCS and Indian
Oil (IOCL). By February 2006, all these share prices have
appreciated. The value of the corpus has increased to
Rs15.09 crore and the NAV of Fund X today works out to
Rs15.0887 (for simplicity, we have assumed no sale or
repurchase in the interim).
February 2006, the MF launches a new Fund Y, raises a
corpus of Rs5 crore, and allots 50 lakh units. It also
invests in the same four shares Nalco, Cipla, TCS
and Indian Oil in the same proportion as Fund X
holds. Now suppose you invest Rs100,000 each in Funds
X and Y. You will get 6627.489 units of Fund X at Rs15.0887
per unit and 10,000 units in Fund Y at Rs10 per unit.
us be optimistic and assume that share prices have risen
by February 2007, raising the corpus of Fund X to Rs18.27
crore (and its NAV to Rs18.2689) and that of Fund Y to
Rs6.05 crore (and its NAV to Rs12.1077). Your investment
value in both cases would be same at Rs121,077! The table
below illustrates this.
Investor should, therefore, remember:
- The earlier appreciation of an existing fund does
not make it expensive vis-à-vis an NFO.
- The 'at par' NAV of an NFO has absolutely no role
to play in the future returns.
- It is the quality of the fund that determines your
returns, not its NAV.
funds do well in a booming stock market. It is those that
significantly and consistently outperform the market indices
over the last
five years that are the real winners. Choose your mutual
fund on the basis of its performance over the last five
years, not on whether it has a low or high NAV.