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Is a fund with a low NAV better?

By Value Research
July 19, 2005 08:43 IST
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ImageI am new to mutual funds and recently signed up for the Stanchart classic equity fund. I have decided to opt for a Systematic Investment Plan of Rs 3,000 a month.

I would like to invest at a low Net Asset Value and hold on for a couple of years. By then, it would definitely grow.

I certainly do not want to invest in a mutual fund where the NAV is high Rs 40 or Rs 50. I feel at that level, they reach saturation point and might not increase anymore. 

What do you think?

Also, I get more units at Rs 10 than at Rs 50.

- Srinivas Turimella

You cannot view a mutual fund unit like a share. There is no 'saturation point' as far as the growth of the Net Asset Value of a fund is concerned. An individual stock may get over valued if its price shoots up, but that is not the case with a mutual fund.

Now, let's look at the NAV.

Basically, it is irrelevant how high or low the NAV of a fund is.

Let's say you want to invest Rs 5,000. Irrespective of which fund you invest in, this amount stays constant.

Now let's say that your choice is restricted between two funds with identical portfolios. Since they both have identical portfolios, their value will increase in the same proportion. You may buy the units of one fund at a higher price than the other. But, the percentage increase would be the same.

Hence, your investment of Rs 5,000 will increase by the same percentage, irrespective of the fund you invest in.

So the number of units you get as well as a high or low NAV are irrelevant. Thus, it is the stocks in a portfolio that determine the returns from a fund, the value of the NAV being immaterial.

You should be making your selection of mutual funds based on past performance, risk and other such factors.

The only instance where a higher NAV will get you fewer units that may affect you is where a dividend has to be received.

Dividend is given per unit. So the fewer the units you get, the lesser the dividend.

I am 26 years old with a monthly income of Rs 20,000. I have two insurance policies for which I pay premium of Rs 4,000 per quarter. My investments in mutual funds are as follows:

Funds

Amount invested

ELSS

HDFC Tax Saver

5,000

HDFC Long Term Advantage

5,000

SBI Magnum Tax Gain

5,000

Equity Diversified

SBI Magnum Contra

5,000

HDFC Premier Multicap

7,000

I would like your opinion about my current portfolio and your suggestions on what type of mutual funds I should select for future investments.

- Harshad Riswadkar

Market cap

As regards your current portfolio, large-cap stocks dominate with about 47% allocation, while mid-caps account for 38% and small-caps make up for the remaining.

Market capitalisation of a company is its share price multiplied by the number of shares. Based on this, companies are classified as large-cap, mid-cap and small-cap.

Your overall allocation across market capitalisations is quite suitable.

Risk-return profile of the funds

The portfolio also looks well diversified across stocks and sectors. Also, three of your funds happen to be five-star rated, which speaks well for the quality of the funds.

We carry out a rating every month which is also carried on rediff.com. If you would like to take a look at the latest ratings, click on the relevant month: March, AprilMay.

In this rating, each fund is given a star. The funds with a 5-star rating are the best. Those with a 1-star rating are the worst.

This star rating is based on risk-adjusted return. In a very simple way, it gives investors an understanding of whether a fund is taking an acceptable amount of risk in generating the kind of returns it is doing.

A fund's return for each month is taken since the day it is launched (only funds with a minimum performance of history of three years are considered).

This return that a fund gives is compared to other 'riskless' investments, like government investments, which have no risk per se. This means funds do not rate very high if they give phenomenal returns, but have taken tremendous risks to do so.

However, HDFC Premier Multicap is a new fund, and hence, does not have a performance record.

Future investments

Magnum Tax Gain is one of the most volatile funds in the category of tax-planning funds.

Consider future investments in it only if you can digest the ups and downs that it might go through at different points of time.

Invest in the ELSS schemes only to the limit of your tax benefit.

Under Section 80C, you can invest up to Rs 1,00,000 to avail of the tax benefit. If under this Section, you are already investing, say Rs 60,000, in other tax-saving instruments and you have just Rs 40,000 balance, then only invest this amount in ELSSs. Don't increase it.

Also, ensure that you are comfortable locking in your money for three years.

Beyond that, look for good diversified equity funds. It would be better to avoid the new funds in the market and opt instead for existing performers. You will get plenty of good funds with an exceptional performance record to choose from. HDFC Equity Fund, Reliance Vision, Franklin India Bluechip Fund are some recommendations.

Choose a couple of good diversified funds and keep investing in them systematically.

Apart from pure equity funds, you can consider a good balanced fund as well to introduce a bit of debt component. HDFC Prudence is one such fund.

Got a question for Value Research? Please write to us!

Value Research

 

Note: Questions may be edited for brevity. Due to the tremendous response, all queries will not be answered.

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Illustration: Dominic Xavier

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