How to factor in returns in a mutual fund investment

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Financial Express/ Mutual Funds The best strategy to compare a fund is with the benchmark along with the category peer.

It is a common misconception that in an open-ended fund, the higher the NAV, the more expensive is the fund. In reality, this is not the case. The net asset value of a fund is nothing but the current total asset value after negating the current total liabilities of a particular scheme and dividing it by the number of units issued by the AMC under that particular fund.

Hence, if you have Rs 100,000 to invest in a mutual fund and you are indecisive between the two funds under a similar category, then you should not base your judgment on its NAV at the start date. For example, let’s say, Fund 1 has a NAV of 50 and Fund 2 has a NAV of 100.

You will be eligible to buy 2000 units of Fund 1 and 1000 units of Fund 2. Imagine if both the funds perform almost equally giving a return of 15 per cent, and considering the fact that the status quo has not changed, the NAV is 57.5 and 115, respectively.

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The value of your investment in both the scenario is Rs 1,15,000. Simple, right?

Hence, to not fog your decision based on the current NAV, rather make a decision based on the returns generated over a period of time. But, there are other factors to keep an eyeball on while evaluating your mutual fund performance. Firstly, do not be led by the scheme’s return in isolation. Your fund may have performed evenly as the market indices, giving you a benchmark return. However, underperformance in a falling market is an alarming situation to review and readjust the portfolio. It is better to get rid of a consistently underperforming scheme. The underperformers can be identified over a long term.

Secondly, consider the “category average return”. Even if a scheme has outperformed its benchmark, there can be better return givers in the similar peer group. Once you calculate the category average return, you will be in a better position to shift to a better performer.

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One mistake which mutual fund investors make is investing and forgetting to review it. Also, reviewing too frequently and succumbing to the temptation of fund shuffling should also be avoided. For an actively-managed fund, one should at least give 1-2 years to the fund to generate the returns.

Frequent tracking and shuffling of mutual funds may tempt you to take emotionally driven impulsive decisions. Refrain from buying too many units of a currently booming fund or a fall in NAV to tempt you into redeeming your SIP. The best strategy is to compare the fund with the benchmark as well as with the category peer.

Remember, the stream of the market may go up or down, many a time, investors let go of an opportunity and many a time, investors err driven by emotions. But, those who make decisions patiently with prudence are often rewarded in abundance.



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