How do I tell if a mutual fund is overpriced or underpriced?
You should look for a fund which is good based on your investment needs and your risk profile
How do I tell if a mutual fund is overpriced or underpriced?
Prateek Shah, Ahmedabad
Unlike a stock, there is no such thing as ‘fair value’ for a mutual fund. So, there’s no question of a mutual fund being overpriced or underpriced. An equity fund is a basket of stocks. You can take each stock in its portfolio, work out its fair value and see if it is overpriced or underpriced. It will take you forever and it is futile. Since your fund manager can change its entire portfolio overnight, you are dealing with a moving target.
It seems you believe that a fund scheme’s NAV (net asset value) is an indicator of overvaluation or undervaluation. The biggest myth that exists is that the lower it’s NAV, the greater its appreciation potential, which is completely unfounded and incorrect. A scheme’s NAV is simply the market value of its portfolio at a given point in time—and its performance is what will determine your returns.
You should look for a fund which is good based on your investment needs and your risk profile. You can do this be reading on the OLM Elite list, which is a composition of 24 funds based on different investor profiles – beginner, safety seeker, conservative, aggressive investor and those looking for alternate to bank deposits. Each of the categories has a choice of about five funds to pick from which have a proven track record and performance history. You could pick any one or two schemes to invest in systematically in them to create wealth in the long run.
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