The NAV of your units would be:

Rs. 150 per share * 15 shares / 10 Units = Rs. 225.

Thus, the value of your units would be Rs. 225 * 10 units = Rs. 2,250.

Surprised??

Bottomline

The bottomline is that shares and units are vastly different, and “at-par” means totally different things in each case.

There is no price advantage for units in an NFO. A mutual fund scheme available at face value is not inexpensive or cheap.

Remember: While at-par means a good deal for shares, it means absolutely nothing as far as MF units are concerned.

(A side note: In the past, the MF companies were explicitly trying to take advantage of people’s belief that at-par MF issues are similar to at-par Initial Public Offerings – or IPOs – of stocks by calling these new issues “IPOs” of the MF scheme.

SEBI directed the MF companies to call these new issues New Fund Offers (NFOs) instead of IPOs, so that at least the name would not mislead the investors!)

Should you buy units in a New Fund Offer (NFO), which is offered “at-par”?

As we saw, the much-hyped advantage of NFOs being at-par is not an advantage at all.

So, are there any other advantages? In most cases, the answer is no.

Mutual Fund investment should be done after doing a lot of research. Since you trust your money to be managed by someone else, you need to make sure that it would be managed well.

The best indicator of a well managed fund is its track record. More specifically (as those of you who read articles on www.RaagVamdatt.com more often would know it well), this is its long-term track record.

You might be tempted to invest in a MF that has done very well in the last year. But it is not a good fund if its long term returns are not good.

Good return over the past 3 years (at least – preferably the last 5 years) indicates that the returns are not one-off, and that the fund is capable of sustaining the good performance.

Therefore, it is extremely important to judge a fund through its long term track record.

I’m sure by now, you would have guessed where I am going – New Fund Offers are “new”, and therefore, NFOs have no track record at all! In that case, how can you know if it would perform well or not?

Well, you can’t! And therefore, you should stay away from them most of the times.

Also, when it comes to existing schemes, you can know its portfolio. Thus, you would know what you are getting into.

In case of a new fund scheme, you have to go just by its investment objectives.

This adds one more “unknown”, and gives us one more reason to stay away from NFOs.

When you should buy units in a New Fund Offer (NFO)

Although it is advisable to invest only in MF schemes having a good long term track record of good performance, there are certain situations when investing in an NFO makes sense.

This is when the new scheme offers something that is totally new – something that is not offered by any other existing fund in the market.

A good example would be the first fund that invested in shares of companies operating overseas (foreign companies). This was a totally new kind of fund that offered a totally different investment avenue to investors.

Another example would be the first fund that took advantage of arbitrage opportunities available in the market. Again, no other fund offered this opportunity, and it was something totally new.

Conclusion

Apart from situations where a new fund offers fresh avenues of investment, stick to an old fund that has a proven track record of good returns over a long period.

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