Question

As a group, investors obtain smaller earnings than the mutual funds they contributed in. In other words investors get a lower say 1 year return than what the mutual fund they invested in got.

What to you think the investors are doing wrong?

Answer 1

It is first important to understand that the Net Asset Value (NAV) of the mutual funds that the group contributed depends on the market prices of all the underlying securities of the scheme

. Few companies do not divulge the market prices of every security they invested in. This is the reason why the market prices and NAV of a fund are rarely the same.

What is more worst is that such circumstances often present an attractive incentive for the mutual funds to manipulate the computation of the NAVs. This actually might have made them skeptical to invest in higher returns and hence invested in a lower 1 year return than the investment in mutual funds.

Second, there are several investors in the market who prefer a scheme with a lower NAV than one with a higher NAV, when two schemes are comparable. There are also those who prefer to invest in a new scheme where the units are issued at say 10$ while existing schemes in the same category may be available at a higher NAV. Such a strategy is naive or void to dangers. Therefore, the investors must have chosen a scheme only based on NAV, while they must have ignored the other merits, such as the quality of service, performance track record, quality of management.