Money Plants

Friday, February 10, 2006

Why MF IPOs are a farce...

1.Offer open at par
Your agent probably told you that you must buy into a MF IPO or as it is now called New Fund Offer (NFO) because the NAV is at Rs 10. He will tell you that the NAV of Rs 10 is far cheaper than the NAV of an existing fund.He is taking you for a ride.

All the money of the fund, whether collected at the time of IPO or otherwise, is invested in equity shares at market price existing at the time of investment. So, if you have invested Rs 10 in a unit of an IPO and after one month, if the shares in which investments have been made grew at 10%, your scheme will have an NAV of Rs 11. Had the same money been invested in another well performing scheme with a similar asset allocation, the NAV again would have grown by 10% notwithstanding what it was earlier.

It’s a common notion that a scheme with an NAV of say Rs 80 is more expensive than a scheme with an NAV of say Rs 10 or Rs 12. This is untrue. Other things remaining equal, if both schemes grow at the rate 10%, the scheme with an NAV of Rs 80 will rise to Rs. 88 whereas a scheme with an NAV of Rs 10 will rise to Rs 11. Therefore, investors should look at the percentage growth in the amount of capital invested and not the number of units they have got or what NAV they have invested at.

2.There’s zero entry load
Another marketing gimmick is to announce a zero entry load on the IPO. If you buy units of an existing scheme, you will have to bear an entry load of between 2-2.5%. However, no such load is levied on your IPO issue.

But that does not mean that IPO issues are free from such charges. Although they are not called entry loads, there are initial issue expenses that the fund house incurs for all the costs of advertisement and distribution during the IPO. This expense is ultimately passed on to the investor. Initial issue expenses can go up to 6%. These expenses can be deferred over a period of five years. So while this 6% will not hit you in one go, it will have an impact on your NAV.

3. New product
Your agent will tell you to buy a fund because it has features different from an existing fund. Mutual Fund IPOs, especially for diversified equity schemes is nothing but old wine in a new bottle.

MF IPOs are just ways for fund houses to garner funds. They offer heavy commissions to agents and distributors to sell IPOs.

So don't fall for these traps. Tell your agent you know better ;-)


Choose a fund which has a track record of good performance. When I say track record I mean a fund that has been around for long enough to have survived bulls runs and bear runs. It would be ideal if you can look at returns of funds for the last 7-10 years.

16 Comments:

  • Most of the ppl are fooled by the NAV 10 concept at the time of NFO. Good this gave a clear insight. U r doing a good job. Keep it up.

    By Blogger REFLEX, at 10:24 PM  

  • Thanks reflex. Glad this helps people.
    Rgds,
    MG.

    By Blogger Money Gardener, at 11:00 PM  

  • Hi MG,

    I have been reading ur blogs lately..They are very informative and helpful.

    I have done my engineering and am currently working with a software firm. I am inclined towards doing some course in Finance. Could you help me out with the courses available and the best out of them.
    Could you also suggest if a course such as CFA would help or do you suggest something else..

    Thanks in advance..

    By Anonymous Anonymous, at 11:10 PM  

  • Hi,
    There are a number of courses in finance. If you can tell me which area of finance interests you, I would be able to help in a better way. For instance, here are some broad areas:
    1) Debt and treasury management
    2) Equity market research, both fundamental and technical
    3) Individual financial planning
    4) Wealth management

    Some of these cater to industry while some to financial advisory.

    Rgds,
    MG.

    By Blogger Money Gardener, at 9:26 PM  

  • Hi MG,

    Thanks for the reply..

    I dont have much idea about 1)Debt and treasury management 2)Wealth management.However, since I do have investments in Equity and MF's , i would like to do some course in that area.

    Also I am Going to work on a project based on fincance domain (involving the fundas of Balance sheet/GL's/ P&L statement etc..)

    Could you suggest some course which would help me strengthen my knowledge in the above mentioned areas.

    By Anonymous Anonymous, at 9:32 PM  

  • Hi
    You are probably interested in individual financial planning.

    To start off with you could choose the certification courses of the Association of Mutual Funds of India for mutual funds.

    The National Stock Exchange also conducts courses. Check out http://www.nse-india.com/ and look under NCFM.

    For understanding balance sheets, you could scan newspapers in your city for courses for non-finance executives. Bombay Stock Exchange conducts these in Mumbai. India Infoline also has these but I am not sure about how good they are.

    Check http://www.indiainfoline.com/bisc/programs/abouprog.html

    Rgds,
    MG.

    By Blogger Money Gardener, at 10:44 PM  

  • Hey thanks MG,

    The information you provided is of great help. I was just going throught the NSE website. There are many courses mentioned there. which one do you think is the best to start up with.

    The Indiainfoline is a good website too.Thanks for the information again.

    By Anonymous Anonymous, at 10:37 PM  

  • Hi Anonymous,
    Pl mail me on money.gardener@rediffmail.com. Will be easier to communicate.
    Rgds
    MG

    By Blogger Money Gardener, at 9:07 PM  

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    By Anonymous Scott Arthur Edwards, at 3:11 PM  

  • Hi MG,

    I would like to know about the market value of the various courses from NSE and BSE. Since I am from a non Finance background, Will these courses help me to get into some Finance company?

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