You may ponder what is the significance of this question. Consider a mutual fund that has achieved a high return rate possibly because it has bought a profitable share at a low price months ago.
Now, suppose that the whole stock index has raised significantly for a while and many individuals are willing to invest in the market. Due to fund fame, many of them will select this mutual fund. The recent significant index raise has caused bubbles in the stock price. Thus, currently, buying new shares does not seem rational.
Now, the question comes in. Does a mutual fund must buy new shares when it issues new units for individuals? If yes, then a negative return rate for the fund is expected after bubble burst if it has issued many units when the market is inflated. Is it correct?