The three mutual fund myths that cost investors the most

I get some version of this question almost every week. “This fund's NAV is just ₹10. Isn't it cheaper than the one at ₹200?” Or, “This fund is small, so it has more room to grow, right?”

I understand where it comes from. We've all grown up looking for a better rate, whether it's vegetables or a flat. But a mutual fund isn't priced like a sabzi mandi (vegetable market), and some of the most common beliefs I hear simply don't hold.

Myth 1: A ₹10 NAV means the fund is cheaper

This is easily the one I hear most.


Think of a pizza. You cut it into 4 slices, your friend cuts the same pizza into 8. He has more slices, but he doesn't have more pizza.

NAV is just the value of one unit. Invest ₹1 lakh at ₹10 and you get 10,000 units. Invest it at ₹100 and you get 1,000 units. Either way you hold ₹1 lakh, and what it becomes depends entirely on how the underlying portfolio performs from here. A 12% return on a ₹10 NAV and a 12% return on a ₹100 NAV leave you with exactly the same money¹.

Myth 2: NFOs are better because they start at ₹10

Many investors treat an NFO the way they'd treat an IPO, getting in early before it ‘gets expensive’.

But an NFO isn't a company being offered at a discount. It's a fresh pool of money that the AMC will invest in the market at whatever prices are prevailing that day. The stocks it buys are the same stocks an existing fund already owns, at the same price².

What you're giving up is a track record. An existing fund lets you see how the manager handled 2020, how the portfolio behaved in a falling market, whether the process is actually followed. With an NFO you're taking all of that on trust. I'd look at one only if it offers something you genuinely can't get from an existing scheme. The ₹10 price is not a reason².

Myth 3: Smaller funds always give better returns

This one has caught on in the last couple of years, especially with small caps doing well.

There's some truth in it. In small caps, a smaller fund can enter and exit positions more easily, and a very large fund can struggle to put fresh money to work without moving prices. But that's a specific situation, not a rule.

Small funds can also mean higher expense ratios and a thinner research team. And in large caps or flexi caps, size hardly matters at all.

When I've looked at rolling five-year returns across the last few market cycles, the “small fund wins” pattern shows up in only a handful of schemes. For most funds, size made very little difference. How the fund was managed made all of it³.

So what should you look at?

The fund's investment philosophy and whether it has stuck to it. The quality of what it owns. And how it held up when markets fell, not only how it did when everything was going up.

Next time someone recommends a fund because the NAV is ₹10 or the AUM is small, ask them one thing: is this a good fund, or just a good story?

References:

1. Link 1
2. Link 2
3. Link 3

This article has been contributed by Sahit Aggarwal, Director, D.R. Share & Stock Brokers Pvt. Ltd. (Member NSE-BSE), Chandigarh & Ambala

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