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Existing Fund or New Fund Offer, which is better Investment ?

Posted By: Admin

Anytime is a good time for investing in a good fund. 

Investors are often attracted to new fund offers (NFOs) from Mutual Fund companies because they come cheaper. They also hope that the NFO may offer better returns than the already existing funds in the long run. However, we need to know that one should be cautious before deciding to invest in an NFO.

“Why buy an existing fund whose NAV is say Rs.250, when you can buy a new scheme at just Rs.10”

An NFO is attractive to an investor because of its low price, however, it carries certain risks with it. An existing fund has several years of track record and has a portfolio that can be dissected to see if it matches the investors’ risk, return and volatility profile. On the other hand, an NFO only has the schemes’ offer letter to rely on. 

Let us understand this concept with two different NAV related Myths.

Fund with higher NAV is better than those with lower NAV…

The starting NAV of mutual funds would be Rs.10. Hence many investors compare the NAV of two funds and jump into conclusion that the fund with higher NAV must have performed better between the two funds. The NAV could have been higher just because the fund has existed for a long period. 

Let’s understand with an example. Take the case of Franklin Prima Fund NAV as on 29th OCT is Rs.1544.6877 if we take another fund in same category Kotak Emerging Equity Fund NAV as on 29th Oct is 71.1300. Franklin Prima has significantly higher NAV, but it does not mean it has performed better then Kotak Emerging Equity Fund. 

Particulars

Franklin India Prima Fund

Kotak Emerging Equity Fund

Inception Date

01-Dec-93

30-Mar-07

Starting NAV

10

10

Returns last 5 years

13.88%

16.90%

NAV on Oct 29, 2021

₹ 1,544.69

₹ 71.13

 

So the takeaway here is to not compare the NAV of two funds to decide which fund would have delivered better returns.

New fund offers (NFOs) can provide a better returns

All new mutual fund offers (NFOs) have the net asset value (NAV) of Rs. 10, so far a given investment, the investor gets more units in an NFO than an existing fund, however that does not mean he will also gain significantly. Between an existing fund and an NFO if the performance is the  same, then the profits for the investor will also be the same.  Please check the working below. 

 

New Fund

Existing Fund

NAV

Rs.10

Rs.100

Investments

Rs.1,00,000

Rs.1,00,000

Number of Units

10,000

1000

NAV at the end of 1 Year (assuming 15% returns)

Rs.11.5

Rs.115

Value of investments

Rs.1,15,000

Rs.1,15,000



As we saw above investing in NFO thinking that it is less expensive is a Myth and one needs to be wary of . 

 

Why should you invest in NFO?

Investors can invest in an NFO if it fits in their investment needs, or there is a theme which can be played through the new fund offer. But  one should compare the advantages and disadvantages before deciding to invest in in NFO. One advantage of looking into NFO is that it can be constructed to respond to the most immediate opportunities prevailing in the market. It becomes difficult for existing funds to rebalance away from their traditional mix to make the most of a new trend. For example: if you want to participate in the potential returns of new-tech IPOs, you’ll probably need to go that route via an NFO. Investing in NFO is not bad as long as it adds fills a void in your portfolio

Conclusion:

 

 Investing  is long term  activity therefore anytime is good time for investing, subject to your age, risk appetite and asset allocation. At the same time some myths are also associated with this investment options, which lead investor to take wrong decisions. With an existing fund you have past performance to look up against, which is missing in a new fund where you may invest based on trust you have on the fund house launching it. 

The only purpose of NAV of a mutual fund scheme is to compare a fund’s NAV to its past NAV , it serves no other purpose.  Fund performance is a factor of the portfolio and returns that the fund has been able to consistently generate rather than any other reasons. 

By Bhuvaneswari, Sherpani

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