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Mutual Fund Myths - Rs 10 per unit = Cheap

Myths Unraveled—Don’t Miss!

There will always be an NFO closing day that you will miss. There will always be a fund you have not invested in that is being touted about as a hot favourite courtesy its very recent performance. There will always be ups and downs in the stock markets and the tendency to think you could lose out on something. Don't worry. In the world of investing chasing reality is better than believing in a myth!

Rs 10 per unit = Cheap

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.

 

 

 

 

 

 

 

 

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.

Silicon Advisors

Presentation courtesy, Fidelity Mutual Fund.