Thursday, February 22, 2007

Discussion on Buying a Mutual Fund

This is a repost of an interesting discussion between a group of people(unknown to each other) who got the same mail from a mutual fund advisor regarding a closed ended new fund offer(NFO)

Nirmala Mani started the discussion by saying, " I am trying to get an idea of how many people in this mailing list were interested in investing in the fund" He wanted to know, "I am taking advantage of this mailing list to find out how many of you were going for the fund"

Sridhar responded by saying, "I am going for it purely on raghu’s recommendation"

I had the following to say on the issue, "My own small research on the issue says that Mutual Funds have their own hidden agenda today. With SEBI allowing them to charge upto 6% as entry load in closed ended funds and the facility to amortise the expenses over the period of the fund, NFOs have become fashionable. They come backed by a huge ad spend and collect thousands of crores from unsuspecting consumers who don't know the difference between open ended and closed ended fund. They are blasted with financial jargon and a well researched advertisement on the print and visual media backed by the persistent agent into succumbing into signing the cheque"

Nirmala responded by saying, "I have simple calculations.

Let us take SBI Magnum Global ... I can now get it in the market @ Rs43+ ... Say in a year it goes to Rs.55 +,
With all the hidden agenda that Reliance Long Term Equity Fund has ... I will get it at par @ Rs 10 ... Say in a year it goes to Rs. 20 in a year. Would I not have doubled the money in a year (tentatively) if I had put my money on RLTEF versus SBI Magnum (since it is already at premium).
You see where I am going ? What would you say in that case.

I again responded with the following:

What I've learned from experts in Mutual Funds (and one of those also happen to be my brother in law and officials working with MFs ) is that we must understand that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of different mutual funds have no relevance.

Investors should choose a scheme based on its merit considering performance track record of the mutual fund , service standards, professional management, etc

Moreover as you must have read in my blogs that these closed ended NFOs are allowed to have upto 6% entry load amortised over the no. of years. This expense of yours goes into marketing, advertising and commission to agents....

In open ended funds u can measure the past performance of the fund managers. In NFOs, u don't know that.

To be fair enough, past performance is not guaranteed in future.

What is your take?

Investing Gyan
Reviews, Tips, Calculators with an Indian perspective.
Post a Comment