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You usually recommend that readers should invest in older funds with a track record, rather than new funds that raise money through initial public offerings.

But I have been given to understand that if a fund is recently launched, then the fund manager is free to invest the available funds in companies of his choice. In an existing one, the fund manager may have to exit from non-performing investments before re-investing this money.

Also, is it true that a new scheme launched after a big fall in the stock markets can do better than an existing fund that has to sell its old investments and then re-invest at lower prices?

Kuldeep Sahasrabudhe

Your view is not entirely correct. Please keep in mind that when you invest in an existing fund, you invest at a price linked to the prevailing net asset value (NAV) for each unit.

The NAV reflects the current market value of all of the fund's holdings as on the date of your investment.

This is especially true of equity funds, where the NAV automatically captures the market value of the stocks in the portfolio at the end of each day.

So, when you invest in an equity fund after a sharp drop in stock prices, you would be entering the fund (and indirectly, the stocks in its portfolio) at market prices, as they stand after the fall.

SEBI regulations also include fairly stringent rules requiring funds to exclude thinly traded or illiquid stocks when calculating their NAVs.

Therefore, when you buy a fund at the prevailing NAV, you may not be saddled with any non-performing investments that are carried at an inflated value in the fund's portfolio.

Whether you invest in an existing fund or in a new one, the returns you earn will always be subject to the timing of your investment. If stock prices fall sharply after you invest, the NAV of your fund too is likely to fall. If stock prices rise, the NAVtoo, is likely to rise.

Yes, a new fund, fresh from its IPO, is likely to hold a larger cash position than an old fund that is already fully invested.

If stock prices fall sharply during the IPO period or just after it, the new fund could experience a smaller fall in its NAV because it has not yet fully invested the money collected from its investors.

However, this advantage is likely to be fleeting, as most equity funds tend to be fully invested within a month or two of their IPO. Thereafter, a new fund is unlikely to offer a significant "cash" advantage.

Do note that there can also be a flip side to the high cash position in a new fund.

Should the market rise sharply during the IPO period or just after it, uninvested cash can prove to be a drag on a new fund's performance.

In this case, the new fund could miss out on opportunities that an old fund can readily capitalise on.

As an investor, you should stop worrying about what temporary fluctuations in the stock market can do to your investment. Instead, invest in equity funds only if you are willing to wait at least for a 3-5 year period.

Investing systematically, and staying with diversified funds with a good five-year record will automatically help you reduce the risks from the ups and downs of the stock market.

Aarati Krishnan

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