Existing MF Vs NFO

[niranjan190]

Hi,
There is a good article in perfsonalfn. Hope this clarifies

http://personalfn.com/detail.asp?date=2/13/2007&story=4

Invest in the mutual fund, not its NAV

February 13, 2007


NFOs (New Fund Offers) launched at an issue price of Rs 10 are perceived to be a good investment opportunity by a large section of mutual fund investors. Similarly, existing mutual funds with a lower NAV (Net Asset Value) often appeal more to investors. Visitors of Personalfn are aware that neither approach to selecting a mutual fund is right. In this note, we revisit our views on investing based on the NAV.

What is NAV? Simply put, NAV is the sum total of all the assets of the mutual fund (at market price) less the expenses (fund manager fees, audit fees, registration fees among others); divide this by the number of units and you arrive at the NAV per unit of the mutual fund. An illustration should help us better understand the same.

NAV calculation
Net Assets (Rs) 51,000
Expenses (Rs) 1,000
No. of Units 5,000
NAV (Rs) 10

So when you wish to invest in a mutual fund, you invest in it at its existing NAV (adjusted for the entry load) i.e. you buy the units at a price (i.e. NAV), the calculation of which is based on the current market price of all the assets that the mutual fund owns. In other words, the NAV represents the fund’s intrinsic worth.

In case of the stock market however, the stock price of a company is usually different from its intrinsic worth, or what is called the book value of the share. The stock price could be higher (premium) or lower (discount) as compared to the book value of the company. A relatively lower share price would, other things being positive, make it an attractive purchase (as the share seems undervalued). The reason for such a ‘mis-pricing’ could be that investors evaluate the company’s future profitability and suitably pay a higher or lower price as compared to its book value. This does not hold true for open-ended mutual funds – they always, always, trade at their book value; so you never buy cheap or expensive in that sense.

The following illustration will clearly establish the irrelevance of NAV while making an investment decision.

NAV: Does size matter?
Open-ended large cap equity funds NAV (Rs) 1-Yr (%)
Franklin Prima Plus (G) 146.17 43.57
Franklin Bluechip (G) 138.10 39.09
Pru ICICI Power (G) 84.51 38.67
HSBC Equity (G) 74.42 37.63
Kotak 30 (G) 72.06 36.54
HDFC Equity (G) 153.79 35.50
(Data sourced from Credence Analytics. NAV as on February 09, 2007)
(To insure a fair comparison we have only considered open-ended equity funds from the predominantly large cap segment.)

Franklin Prima Plus with an NAV of Rs 146.17 (second highest NAV in our sample) clocked a growth of 43.57% over 1-Yr and is the top performer in the segment. Pru ICICI Power with a much lower NAV of Rs 84.51 has clocked a return of 38.67%. Kotak 30 with a lowest NAV of Rs 72.06 has clocked a return of 36.54% and performed better then HDFC Equity which has the highest NAV of Rs 153.79 but recorded an NAV appreciation of 35.50%, which is the lowest in our sample. This table clearly indicates that there is no correlation between the NAV and the performance of the mutual fund.

It is evident that the fund's current NAV and its expected performance are unrelated and therefore making an investment decision based on the NAV would be misguided. As an investor you need to consider factors like your own risk profile, the fund’s management style and performance.

1. Risk profile

Investors have a risk profile that dictates how much risk they can take on to achieve their investment objective. In this backdrop, they must identify mutual funds that can help them meet their investment objectives at the desired risk level. For instance, some equity funds adhere to the growth style of investment (aggressively managed funds), while others follow the value style of investment (conservatively managed funds). So it is important for investors to select a fund that takes on risk in line with their own risk appetite.

2. Fund management style

Fund houses have varying fund management styles and processes. Some pursue the individualistic style, where the fund manager rather than the investment process plays a dominant role in the investment process. As opposed to this, there are fund houses that pursue a team-based investment approach where the investment process holds sway over the individual. Our preference is for the team-based style of investing since it is more stable and the mutual fund (and its investors) is not over-dependent on an individual.

3. Mutual fund performance

It is imperative for investors to evaluate a mutual fund on parameters related to risk like Standard Deviation and Sharpe Ratio as also NAV appreciation. The risk parameters evaluate the volatility in performance (Standard Deviation) and returns generated by the fund per unit of risk borne (Sharpe Ratio). The best deal for an investor will come from a mutual fund that has higher NAV appreciation and Sharpe Ratio and lower Standard Deviation.

Hopefully, we have resolved the debate on the NAV and have given the investor more relevant points to inquire about before considering investing in a mutual fund. So the next time your mutual fund distributor advances the low NAV or Rs 10 NAV argument, demand a detailed analysis of the mutual fund based on the parameters we have listed.

[bansalg]

Totally Agree with statement "Invest in the mutual fund, not its NAV"

NAV tells the value of underlying assets. In NFO if Rs 10 -> Rs 13 , so in existing you can expect Rs100-> Rs 130. But in existing schemes, since you know the performance of MF over 3-4 years , you will have more confidence.

[deepakji]

Thank you Mr. Niranjan for your detailed explanation...I appreciate the pains you have taken for a layman to understand.

[deepakji]

Thank you Mr. Bansalq.....I understand now.

[tasin]

Originally Posted by bansalg

Totally Agree with statement "Invest in the mutual fund, not its NAV"

NAV tells the value of underlying assets. In NFO if Rs 10 -> Rs 13 , so in existing you can expect Rs100-> Rs 130. But in existing schemes, since you know the performance of MF over 3-4 years , you will have more confidence.

Nutshell mein good example of the beautiful explanation by niranjan190...
Thanks

[jkcool]

Hi ,
Could you please explain the advantages of New Fund offers (NFO) compared to existing Mutual funds ?

[Vicky78]

Nothing... there are only disadvantages in a NFO

There is no record to prove that fund matches its objective
No idea of what kind of risk the fund takes
and no idea about the way the fund is managed or the kind of returns it has delivered.

In short NFOs are totally useless whereas in an existing fund you could judge if it is useless or not.

[PARAS9MAY]

Originally Posted by jkcool

Hi ,
Could you please explain the advantages of New Fund offers (NFO) compared to existing Mutual funds ?

Hi JK,
Thank you for asking. It seems you noticed the difference and that's why you set out to crystallize your thoughts.

I studied this phenomenon a lot. I actually put my money into it. I found existing MF's were better at generating decent returns.
I chose a total of four funds one old and one new from the same company and I chose two such companies (AMC's)
I've included a hypothetical return from Benchmark Niftybees to let you compare the market vs old MFs and NFO.

I hope the returns report says it all
incase it does not. Heres' the gist.The de3cision to invest is yours .....

Hypothetical MF Benchmark Niftybees 55.74%
SBI Blue Chip- NFO 14.5%
SBI Emerging Business 32.51%
Tata Equity Opportunities 33.86%
Averaged Return 23.29%

[jkcool]

I thought of purchasing Tata Indo-Global Infrastructure Fund - NFO which closes on 15 Oct.
no entry and exit loads ... and I believe infra structure is fast growing

[Vicky78]

plain vanilla funds should form the core of your portfolio

global funds... well other than the honk kong exchange none of the global indexes have beaten the nifty or sensex. So I would not recommend it.

Infrastructure fund, the best would be DSP ML TIger. The advantage of this fund is that It not only invests in infrastructure stocks but it could also invest in any sector that involves in economic reforms. Say there is a reform in agriculture this fund will invest in that too. It has a great 3 yr, 2yr, 1yr , 6month track record. It is one of the best infrastructure funds available in the market. Also it invest more than 50% in large caps.

Given the aggressive nature of DSPML TIGER, your could choose one low risk large cap oriented fund from any :- Franklin India Prima Plus, Birla Sunlife Frontline Equity, DSP ML top 100, Magnum Contra.

In the midcap space, Birla Midcap is an ideal choice. However if you have thirst for newer fund you could choose Standard Charted Premier Equity is doing good. It has protected the downside in 2007 by taking huge cash positions during volatility and bearish periods. (Although it did lose a lot in May-june 06) However there have been many funds like ICICI Emerging Leaders fund which showed a lot of promise one year and turned out be average performers next year.

These 3 funds would make up an aggressive portfolio.