Mutual Funds NFO, Are They Worth Investing?

I am amazed, at times stunned, seeing people run after the mutual fund NFO’s (New Fund Offer). As it is, the financial market is extremely volatile, thanks to the escalating prices of crude oil which has touched the seemingly impossible peak of $140 per barrel. This coupled with the scarcity of foodgrain has seen the predictions of many a financial guru crumble to dust. People have been hard hit by inflation all over the world, yet there is this rare breed of people who do not wait to reason before jumping in to purchase a NFO. They are doing so because the same is being offered at its base price… so what?

Let us go back two years into the past. I have seen people boasting their heads off that the mutual funds they had purchased at a basic price of Rs.10 per unit has given them a return of 20% on the base price during the course of a year. The value of the same had become Rs.12. I do not wish to dampen their happiness, but I had purchased those same funds 8 months after them at Rs.11 per unit. The price of the same too is now Rs.12.

Let us make a simple calculation. Over a period of 12 months the gentlemen in question had made a net gain of 20% on their investment, i.e.: 1.66% per month. My gains were 10.9% over a period of 4 months, i.e.: 2.72%. It does not require a financial wizard to who gained more over a certain period of time on the sum invested by them. Yet people keep on chasing the NFO. They are in the belief that they can make a killing by purchasing the same at its base price.

New funds require some time to establish themselves in the market, irrespective of the value and reputation of the fund manager. This period is generally between 6-9 months. New funds released by leading fund houses have been known to perform worse for the first 12 months. It is better that if one observes an initial offering for a few months and studies their performance before purchasing the same.

Let us come back to the present. Quite a number of NFO’s have been released during January 2008 and as is won’t of me, I did not purchase them. A close associate of mine had purchased 100 units of one such fund at the base price of Rs.10 per fund making his total investment in that fund equal to Rs.1000. The markets have toppled and along with it the mutual funds too. A few days back, towards the end of June, 2008, I had purchased 100 units of the same fund at a depreciated price of Rs.8 per unit, hence my investment is just Rs.800.

Assuming that in the near future, the markets will pick up and by the end of January 2009 this particular fund will have a market value of Rs.11 per unit. Can someone please do the calculations for me?