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HDFC Asset Management Company Limited
 High & Low NAV

Dynamics
Chapter:
o Breaking the low/high NAV myth with illustration

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 9.1 BREAKING THE LOW/HIGH NAV MITH WITH ILLUSTRATION

The most commonly asked question by investors while investing in any mutual fund
scheme is - how much is the NAV. If the NAV is high let’s say Rs.50, Rs.175 or Rs.445 they
are in a dilemma whether to invest in those or look for those schemes which are quoting
at Rs.10, Rs.12 or Rs.18. In fact, many a times an advisor would have lost an important
investment because the recommended scheme's NAV was high. Are the investors right in
their argument that low NAV mutual fund schemes offer better returns compared to
higher NAV schemes? What the investors do not realize is the fact that the NAV
which today is at Rs.50 or Rs.175 or even Rs.445 was once Rs.10 and that they have
grown to this current NAV levels only after they have gone thru various growth phases of
the market. Even big investors, knowledgeable investors, so-called intelligent
investors tend to discard an investment if the NAV is high.

It is like buying one kilo of apple; big ones you may get four pieces but smaller ones you
may get 6 pieces; will it actually make any difference? 100 grams per apple is equivalent
to two apples of 50 grams each isn’t it? Investing to get more units is like buying 6 apples
instead of 4 apples for the same weight & cost.

Please refer to the sample workings below taking into account three different balanced
funds - two existing schemes and one new fund at different NAVs; see how the
investment actually offers similar returns in the end:

(PTO for the table)

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 CALCULATION / WORKINGS FOR DIFFERENT NAV
LEVELS
(EXAMPLE TAKEN ON A BALANCED FUND)
(existing scheme) (existing scheme) (new scheme)
PARTICULARS HDFC PRUDENCE XYZ BALANCED NEW BALANCED
FUND FUND FUND
NAV AS ON 31.12.2013 (growth 245.97 61.94 10.00
option)

UNITS ALLOTED ON INVESTMENT 406.55 1614.46 10000

AMOUNT OF Rs.1 LAKH
(Working) ------------------------------ (Rs.100000 / (Rs.100000 / 61.94) (Rs.100000 /
245.97) 10.00)

THE SCHEME’S NAV GROWS AT 295.16 74.33 12.00

20% IN 6 MONTHS (assumed)
(Working) ------------------------------ (245.97 * 20%) (61.94 * 20%) (10.00 * 20%)

NOW MULTIPLY THE ALLOTED 120000.00 120000.00 120000.00

UNITS
(406.25 units * (1614.46 units * (10000 units *
Rs.295.16) Rs.74.33) Rs.12)

GROWTH PERCENTAGE 20% 20% 20%

Returns are the Returns are the Returns are the

same same same

We can see from the above illustration that investing in schemes that are of low NAVs
does not necessarily lead to higher returns. But very important is to compare similar
schemes such as Balanced to Balanced, Large Cap to Large Cap, Mid Cap to Mid Cap and
so on which would be the correct way of measuring the performance for similar period
with different entry NAV levels.

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The progressive question one should ask about investing in mutual funds is not IS IT RISKY
TO INVEST BUT TO ASK HOW TO MANAGE RISK. BECAUSE INVESTING IN EQUITY IS NOT A
CHOICE ANYMORE!!

LET’S NOT BE RISK AVERSE, BUT LET’S BE RISK AWARE

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