Buying mutual fund NFOs to get units at Rs10 is a misconception

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I have 5 lakh and I’m thinking of investing in mutual funds as lump sum, especially in the NFO period, so that I can get the unit value at Rs10. Is it a good strategy to invest as a lump sum because existing fund NAV will be high?

Name withheld

Answer by Harshad Chetanwala, founder, Mywealthgrowth.com

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The question you have put forward has been there for years and the issue continues to confuse investors. Investing in NFO for getting units at Rs10 which is cheaper compared to existing funds where the NAV is high is one of the biggest misconceptions in mutual fund investing. Let us understand with the help of an example.

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MF investing.

As evident from the above table, what really matters is the portfolio and performance of the fund, and not the number of units you hold in the fund. In the above example, even though you would have invested in an existing fund, the value of your investment after one year would have been same as both the funds have appreciated by 10%.

It is better to invest in existing funds instead of NFOs as there is more information about these funds like their portfolio, past performance and other details. From an investment perspective, look at an NFO if that fund is offering a unique investment opportunity that is not available at present within existing funds. Otherwise, you can invest in existing funds after analysing them without worrying about the NAV.

(Do you have personal finance queries? Send them to [email protected] and get them answered by industry experts)

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