Investment Myth: NFO fund is better than an already running equity fund

In a short conversation with a small town investor, I discovered how they are pitched such mutual funds in the NFO category (New fund offers). The basic premise that the investor is made aware of is that you buy a fund in “units” and the price of each unit is called the NAV (Net Asset Value). You are therefore conditioned to believe that a fund with a lower NAV is far better and cheaper. So an NFO is better than an already running equity fund.

Please note if someone is asking you to choose a fund simply because it has a lower NAV he is simply misguiding you. In fact, what should really matters more for you is that –

  1. What sort of a fund your are putting your money into?
  2. What was its past performance during the different market cycles?
  3. How the fund manager manages the fund?

So a fund “X” with an NAV of let’s say 20/- and another fund “Y” with an NAV of 200/- will generate the same returns if the underlying assets (stocks) and the overall portfolio is the same. So comparing the NAV of fund “X” with fund “Y” is quite a futile activity and this can actually lead you to make random investment decisions.

Second point of discussion is the “Dividends” that the mutual fund scheme generates. The problems with MF dividends are - they are practically not at all any dividend or surpluses of any sort!! Let’s take an example - say the value of your mutual fund folio is 2 lakhs and the fund house declares a dividend of 10,000/- the value of that investment would be 1.9 Lakhs (2Lakh minus 10,000). It’s that simple. There is no such additional benefit that you have garnered but a common investor is always conditioned to believe that a dividend generating fund is better than a growth fund and so on and so forth.

This dividend option is convenient if you would like to withdraw money from the fund on a regular basis. Please note you don’t get anything extra by opting for a dividend plan. Please note that dividend declaration by a fund is not guaranteed at any point in time, it depends solely on the fund house discretion to declare dividends for the investors.

So next time if someone tries to convince by stating that a lower NAV plans are better off than a high NAV plan & a dividend plan is better than a growth plan be cautious. What’s really unfortunate is that both these misconceptions are widespread. So make sure the next time if someone pitches you such a thing please think for a while before taking a decision. Till then Happy Investing.