Every time the NAV appreciates by 10-15%, Jiten sells it and invests in another Mutual Fund Scheme with a lower NAV.
Here, Jiten makes a very fundamental mistake, in fact, two fundamental mistakes.
The profit-booking strategy that applies to stocks does not hold true for MFs. When you sell a particular stock, you do so because its ‘price’ has overshot its ‘value’. In short, it has become overvalued.
In a mutual fund, the fund manager is also precisely doing the same. He is regularly booking profits by selling overvalued stocks and buying the under-valued ones. Therefore, despite the fact that its NAV may have gone up, the particular MF may still be a good buy as its ‘new’ portfolio is under-valued.
By selling his MF — purely from a profit booking perspective, Jiten actually ends-up selling a good investment. Hence, he did not make "good" money. Never sell your MF solely based on the appreciation in its NAV.
Since this is important, I repeat, buying mutual funds is different from buying shares directly. So, please do not apply the same logic to both of them.
Second fundamental mistake — NAV of a fund is a ‘useless’ number. Low NAV ‘does not’ imply that it is cheap. Let me try to put it in a different way. If you invest in two funds with the same portfolio (for example an index fund), you will make ‘exactly’ the same returns in both the funds even if one has NAV of Rs 10 and the other Rs 500. [See 'Did you know that NAV of a mutual fund has 'zero' impact on your returns?']
That apart, Jiten is ‘unnecessarily’ piling up transaction costs and taxes that eat into his returns.
Both a Mercedes car and a Tractor are 4-wheelers. Yet, you cannot cultivate your land with a Mercedes car. And it would look pretty stupid to use a tractor to move around in a city. I am sure you get the point.
[An excerpt from 'Your Guide to Finance and Investments']
