Their rationale: Why invest in a new fund where there are good ones already in the market? Why venture into new territory when you know the old devils?

And, the Rs 10 spiel (you only pay Rs 10 per unit when you buy units of a new mutual fund scheme) does not hold much ground. Let's say you buy the units of two funds, one at Rs 50 and the other at Rs 10. If both appreciate by 10%, your net returns are the same.

On both counts, their logic cannot be faulted. However, what happened to me was the reverse.

• When the NAV is misleading

My experience

I invested Rs 10,000 in an Initial Public Offering from a mutual fund - Sundaram India Leadership Fund - in June 2004. Being an IPO, I got each unit for Rs 10.

I simultaneously invested Rs 10,000 with an established fund - Sundaram Growth. This one's Net Asset Value was Rs 25.

Both investments were made in June 2004.

Let's look at the Net Asset Value a year down the road.

Do note that all the NAVs and one-year returns mentioned below are calculated as on August 16, 2005. They are for the growth option of the schemes. To understand the difference between growth and dividend schemes, read The best mutual fund scheme for you.

Now, Sundaram India Leadership has an NAV of 17.66 and Sundaram Growth has an NAV of 40.10.

It is apparent, I benefit more from the IPO investment. And, when you take into account the fact that I have not accounted for the entry load in Sundaram Growth, it is obvious that the IPO was a better bet.

• Is a fund with a low NAV better?

Some good IPOs

Let's say you had invested in a few IPOs last year.

You might have got higher returns if you planned on selling them this year than what you would have got if you invested in existing schemes.

Check out the returns you would have got from some of them. 
 

Mutual Fund	Launch	Returns
Chola Midcap Fund	July 2004	83.86%
Tata Equity PE	June 2004	65.27%
Sundaram India Leadership Fund	June 2004	75.70%
DSPML T.I.G.E.R	May 2004	68.01%
UTI Basic Industries	April 2004	86.80%
Franklin India Opportunities	March 2004	81.49%
ING Vysya Tax Savings	March 2004	89.82%

This would have been more than the one-year return from some funds already established by then.

For instance, Birla Mid Cap (78%), Alliance Basic Industries (58.96%), Birla India Opportunities (50.05%) all have lower one-year returns than their newer counterparts above.

• Should I invest in a mid-cap fund?

Hop onto the IPO bandwagon?

Not so soon.

I am not for one single moment implying that fund IPOs make better investments. All I am saying is that no hard and fast rules apply.

Do some groundwork before hopping onto the fund IPO bandwagon.

1. Do you like the concept of the fund? If it is a mid-cap fund, do you know what a mid-cap fund is? How risky it is?

2. Is it from a fund house that is reputable and trustworthy?

3. Has the fund manager managed other funds? How are they performing? Are you happy with his performance?

4. Is he a new fund manager? Then check to see how the fund house as a whole is performing.

Finally, when you do make your decision, do so on your terms. Not solely on someone else's suggestions.

Note: All the NAVs and one-year returns are calculated as on August 16, 2005. They are for the growth option of the schemes.