A fund with a low Net Asset Value (NAV) is better than a fund with a higher NAV
This is one of the most common myths. A fund’s NAV represents the market value of its investments which determine the movement of the NAV. Example: Let’s say you invest Rs. 1,000 each in two funds - Fund A with NAV of Rs.10 and Fund B with NAV of Rs.100. You get 100 units of A and 10 units of B.
Scenario 1: If both the funds return 10% in one year, the NAV of Fund A becomes Rs. 11 and that of Fund B becomes Rs.110. Your investment grows to Rs.1,100 in both cases. Since returns are the same, the NAV value of the two funds does not have any impact.
Scenario 2: Suppose Fund A gives a return of 10% and Fund B gives a return of 20% in one year, then the NAV of Fund A becomes Rs. 11 and that of Fund B becomes Rs. 120. However, your returns from the two funds are different. Your money grows to Rs. 1,100 in Fund A, whereas it grows to Rs. 1,200 in Fund B. So the fund which looked cheaper with a lower NAV actually gave you lower returns.
Thus the growth in your money depends on the fund performance and not in NAV value. A low NAV can only get you more units in the fund, but doesn't necessarily guarantee high returns.
New Fund Offers (NFOs) are better bets compared to existing funds
NFOs are riskier compared to existing funds since they don’t have a track record for comparison. It is better to choose a fund with a long term performance record.
Funds declaring dividend are better
When funds declare dividends, the NAV is adjusted accordingly. Dividend distribution expenses are also borne by the unit holders. If you invest in a growth scheme, the returns are deployed back into the fund, giving you the benefit of compounding. Further, sometimes dividends are declared when there is no attractive investment opportunity for the fund’s surplus, simply to attract investors.
Last year’s top performing funds are better
Mutual funds give the best returns over a long term. Further, it is important to study the long term performance of a fund (over 5-10 years), to understand how the fund has performed in all business cycles. Looking at 1 or 2 year time-frame will often give erroneous results.
Investing in many funds is better
Mutual funds are by themselves a diversification vehicle, as each scheme invests in 30-40 stocks. Therefore there is no need for you to hold more than 4-6 good quality funds of different types. When you hold a large number of funds, you may not be able to track your investment and may be losing money on the bad funds you hold.
Team Getting You Rich