A new fund's ₹10 unit price can create a false perception of value, making it appear cheaper than established funds with higher NAVs. According to reports from Mint, this illusion is especially powerful when first-time investors enter the market, as they apply their existing mental models of pricing to mutual funds. The problem stems from the industry's habit of referring to NAV as the 'price' of a fund, leading investors to compare fund prices just like they would compare car prices. As Mint explains, NAV represents the value of one unit of a mutual fund scheme and is calculated based on the market value of the scheme's investments after deducting liabilities and provisions, then divided by the total number of units outstanding. This misconception was recently illustrated by a successful businessman who, despite understanding money well, mistakenly believed that a liquid fund with a ₹37 NAV was superior to another with a ₹35 NAV, simply because of the lower price point.
New fund offers (NFOs) are almost always priced at ₹10, with no accounting or regulatory reason for this specific pricing. As reported by Mint, when a fund launches at ₹10 and established funds in the same category are priced at ₹80 or ₹300, investors naturally apply the car-showroom mental model, perceiving the new fund as cheap and established funds as expensive. This pricing strategy is particularly effective during market upswings when new investors are entering the market. According to Mint, NFOs often attract attention when market participation is increasing and more investors are looking for opportunities to enter mutual funds. For a new investor, the ₹10 offer price can create the impression that the fund has greater room to grow simply because its starting price is low. The industry deliberately exploits this psychological effect, launching NFOs after markets have run up when investor interest is highest, making the ₹10 unit price the easiest sale in the business.
The fundamental truth is that NAV is irrelevant to returns. According to Mint reports, two identical funds with NAVs of ₹10 and ₹500 respectively would deliver identical returns when invested with the same amount. For example, investing ₹5,000 in both funds would result in 500 units of the ₹10 NAV fund versus 10 units of the ₹500 NAV fund, but both portfolios would gain the same percentage when markets rise. As Mint explains, the number of units you own is different, but the investment value is the same because the performance depends on the underlying portfolio. The only factor that matters is the fund manager's skill and competence, not the NAV price. This mathematical reality was demonstrated when a mid-cap fund with a ₹37 NAV was compared to another with a ₹35 NAV, with both funds having identical portfolios and identical performance potential.
The ₹10 NFO problem serves as an extremely useful misunderstanding for mutual funds and their salespeople, as reported by Mint. NFOs are typically launched after markets have run up, when new investors are entering the market, creating optimal conditions for sales. The ₹10 unit price to first-time investors represents the easiest sale in the business, as it capitalizes on their lack of experience with mutual fund pricing and their natural tendency to compare prices like other consumer goods. According to Mint, choosing a mutual fund simply because it has a low NAV can therefore lead to a misguided investment decision. While there are exceptions such as when Indian investors first invested abroad through fund of funds with proven credentials, the fundamental test remains whether the new fund offers something in the portfolio that cannot be found in existing funds.
According to Mint reports, low or high NAV should never be used as a basis for investment decisions. The basic idea that NAV price determines fund value is fundamentally wrong and can serve as a red flag for detecting misleading fund salespeople. Investors should avoid anyone recommending funds based solely on NAV price, as this indicates deliberate misguidance rather than genuine investment advice. As Mint emphasizes, investors should instead examine factors such as the fund's investment strategy, portfolio, risk level, costs, consistency of performance and the fund manager's track record. The test for new funds remains whether they offer something in the portfolio that cannot be found in existing funds. Anyone asking you to choose a fund because it has a low NAV is misguiding you, and you should stop dealing with that person or outfit, as there are no exceptions to this rule.
