Naya Hai Wah..!

 ..Naya Hai Wah !

- Dr. Virendra Tatake

    An important event in the history of Indian mutual funds took place in the first week of July 2021 . Huge amount of Rs  Ten Thousand Crore  was invested in the new fund offer(NFO ) of ICICI Prudential Flexicap Fund. This is the first time such a large amount has been deposited in any new fund. About four lakh retail investors have invested in this new fund .This can be said to be a positive result of the growing awareness among  investors about mutual fund investing.

  When any new mutual fund comes in the market, its price is Rs. 10 per unit. The market price of an existing old mutual fund unit in the market is definitely

much higher than this. This makes investors more inclined towards new mutual funds.

But while doing so, investors should keep in mind  following three points

 1. Understand the difference between NFO and IPO

There is a fundamental difference between a New Fund Offer (NFO) and an Initial Public Offer (IPO). In an IPO, a company brings new shares to the market. The number of such stocks is limited so if the demand for such stocks is much higher than the supply (oversubscription) then the market price of such stocks is likely to increase rapidly in a few days. In NFOs, on the other hand, the number of mutual fund units is unlimited, so it is unlikely that such a benefit will be available in the short run.

 2. New funds are not cheap

It may  be misunderstood that a new fund of Rs 10 is cheaper and older funds in the market are more expensive. However, any fund invests in market shares from the accumulated amount, so the profit and loss of the investor depends on the market value of these stocks. Therefore, it is wrong to assume that a fund available for Rs.10  is cheaper. Older funds may seem expensive at first glance, but they might have purchased shares at a lower prices, which benefits investors.

Therefore, instead of looking at the unit price of a mutual fund, look at its returns  .

We can understand it with the help of a simple example  this. If a new mutual fund, priced at Rs 10  with annual has  returns of  20 per cent over the next year, it  will cost Rs 12 per unit after one year. On the other hand, if a mutual fund with a price of Rs. 200 gives a return of 40% , its price will be Rs.280

 This means that the market value of one lakh rupees invested in a new mutual fund will be one lakh twenty thousand rupees while the market value of one lakh rupees invested in an old fund will be one lakh forty thousand rupees. Therefore, it is important to keep in mind that the profit and loss of an investor depends on the annual returns rather than the unit price of the mutual fund.

 3. New Mutual Fund's Progress Book is not available

It is easy to evaluate the performance of old mutual funds. Information is easily available on how much such funds have returned so far, how much their assets are, how they performed during the previous ups and downs, and whether they are better than other competing mutual funds. In the case of new funds, however, no such information is available as the performance of that fund has not yet started.  So it can be risky to make a large investment in such a fund .

 What should investors do ?

Avoid the hassle of investing in every new mutual fund that comes into the market. Instead, study the investment strategy of such funds and understand their investment objectives. Invest in a new fund if it is innovative and you have not invested in such a fund before. If the stock market is at a very high level when investing in a new fund, then one should adopt SIP route of investment rather than lump sum investment .

(The author is associated with IGBS as Director)

Dr. Virendra Tatake
Director
Indira Global Business School, Pune