Mutual Fund Sahi Hai! But Samjha Kya?

We’ve all seen those ads.

Cricketers confidently declaring — "Mutual Fund Sahi Hai!"

You nod along and maybe even have an SIP running - ₹500 or ₹1000 quietly deducted from your bank every month like a Netflix subscription you forgot to cancel.

But let’s be honest — do we know how mutual funds work?

Who handles our money? What is NAV? What’s this NFO that keeps popping up? And why do they make mutual funds sound like a once-in-a-lifetime opportunity? In this blog post, let’s finally break it all down — in simple, real-talk terms

INTRODUCTION

Mutual fund companies — the ones you see in ads or hear about in conversations — are officially known as Asset Management Companies (AMCs). These institutions create, manage, and operate mutual fund schemes. They pool money from investors like you and me and appoint professional fund managers to invest that money in stocks, bonds, or other assets based on the fund's objective.

Let’s say 1,000 people invest in a mutual fund.

The fund manager pools all that money — say ₹10 crore — into one big basket.

Then, they create a portfolio like:

∙       30% in Reliance

∙       20% in Infosys

∙       15% in HDFC Bank

∙       10% in L&T

∙       and so on...

This portfolio is created based on the fund’s objective (e.g. large-cap, infrastructure, balanced, etc.)

So whether you invest ₹500 or ₹5 lakh — you’re buying a piece of that same basket in the form of units. Everyone shares the same portfolio in proportion to how much they invested.

New Fund Offer (NFO) Period

When an AMC (Asset Management Company) starts a new mutual fund scheme, it invites people to invest in it for the first time through an NFO — just like a company launches an IPO before it lists on the stock market.

During an NFO:

∙       The fund doesn’t have a portfolio yet

∙       Investors put in money, and the AMC uses that to build the portfolio

∙       The initial NAV (Net Asset Value) is usually set at ₹10 per unit (just for convenience)

Say ICICI Prudential launches the Infrastructure Fund as an NFO.

∙       They set the NAV at ₹10 (standard for most new funds)

∙       Investors put in ₹10 crore during the NFO

Units = Total Money Invested ÷ NAV

In this case:

∙       Total Money = ₹10 crore

∙       NAV = ₹10

So: Units issued = ₹10 crore ÷ ₹10 = 1 crore units

Everyone who invests gets a share of that one crore units based on how much they have invested.

For example, if Rahul has invested ₹10,000, he gets ₹10,000/₹10 = 1000 units. The risk in the NFO period is that you trust the fund manager’s strategy because there is no past data to evaluate how the new fund will perform in different market conditions.

“If I invest during the NFO, I’ll get it at ₹10 — cheap! That’s better than investing in a fund whose NAV is ₹150.” Sounds like a smart deal, right? But it’s a trap — and here’s why:

Let’s Compare Two Funds:

Fund A (NFO)	Fund B (Old Fund)
NFO Offer price = ₹10	NAV = ₹150
You buy 1000 units = ₹10,000	You buy 66.67 units = ₹10,000
NAV grows to ₹11 → value = ₹11,000	NAV grows to ₹165 → value = ₹11,000

In both cases, return = 10% So it doesn’t matter how many units you got or what the NAV was — what matters is how much the fund grew.

“Don’t get lured by the ₹10 price tag. A good fund at ₹150 can be far more rewarding than a new fund at ₹10.” Invest based on quality, not just the unit price.

So now that we’ve seen how ₹10 NAV vs. ₹150 NAV doesn’t affect returns let’s talk about how NAV changes every day — because that’s where the real action is!

So, how Does NAV Change Daily?

Net Asset Value (NAV)

Think of a mutual fund as a giant basket filled with stocks, bonds, and cash. Every day, the market value of these investments goes up or down based on how the portfolio performs.

Let’s say Fund B (NAV ₹150) holds:

∙       Reliance (40%)

∙       Infosys (30%)

∙       HDFC Bank (30%)

If today the stock prices of these companies go up, the fund's total value increases, and since the number of units stays the same, the NAV also increases.

The NAV reflects the real-time value of one unit of the fund. It’s calculated at the end of each market day and determines how many units you get when you invest — and what your investment is worth when you redeem.

A common myth among new investors is that a lower NAV means a cheaper or better mutual fund. NAV does not indicate how cheap or expensive a mutual fund is. It reflects the fund’s portfolio's per-unit market value at a given time. For example, if a fund’s NAV was ₹50 last year and is ₹60 now, it shows a 20% growth. That’s meaningful performance data.

Whether the NAV is ₹10 or ₹100, it matters how well the fund performs after you invest — i.e., how much it grows. A fund with ₹100 NAV could give better returns than one with ₹10 NAV. So, don’t judge an NFO by its issue price or an existing MF scheme solely by its NAV.

In most cases, it's wiser to invest in an existing mutual fund in the same category with a proven track record, consistent returns, and a visible investment strategy and avoid investing in NFOs. Still, an exception can be made If the NFO is launching a fund in an entirely new category, asset class, or strategy that isn't currently available in the mutual fund space. 

Even if you're interested in the NFO, you don't have to rush — you can always invest in the same fund after the NFO closes, once it's live and the performance begins to take shape.