When browsing mutual funds, you’ll notice each fund has a “NAV” — some at ₹15, others at ₹500 or even ₹1,000. Many beginners assume a fund with lower NAV is “cheaper” and a better deal. This is one of the biggest misconceptions in mutual fund investing. Let’s clear it up once and for all.
Quick Answer: NAV (Net Asset Value) is the per-unit price of a mutual fund, calculated as (Total Assets – Liabilities) ÷ Number of Units. A low NAV does NOT mean a cheap or better fund. NAV has zero impact on future returns — what matters is the fund’s portfolio quality and expense ratio.
What Is NAV? The Formula
NAV stands for Net Asset Value. It represents the market value of one unit of a mutual fund scheme.
NAV = (Total Assets of the Fund – Total Liabilities) ÷ Total Number of Outstanding Units
Example
A mutual fund has:
- Total assets (stocks, bonds, cash): ₹500 crore
- Total liabilities (expenses owed): ₹2 crore
- Total units issued to investors: 10 crore units
NAV = (₹500 crore – ₹2 crore) ÷ 10 crore = ₹49.80 per unit
If you invest ₹10,000 at this NAV, you get: ₹10,000 ÷ ₹49.80 = ~200.8 units
How NAV Changes Daily
SEBI mandates that all mutual fund houses calculate and publish NAV at the end of every business day. NAV changes because:
- Stock prices in the fund’s portfolio move up or down
- Dividends or interest are received by the fund
- Fund expenses (management fee) are deducted daily
- New investors buy units or existing investors redeem
AMFI publishes NAVs of all mutual fund schemes on its website (amfiindia.com) by 11 PM every business day.
Why Low NAV Does NOT Mean a Cheap Fund
This is the most common NAV misconception. Let’s bust it with an example:
Fund A: NAV ₹20 vs Fund B: NAV ₹200
You invest ₹10,000 in each:
- Fund A: You get 500 units (₹10,000 ÷ ₹20)
- Fund B: You get 50 units (₹10,000 ÷ ₹200)
If both funds grow 20% in a year:
- Fund A: NAV becomes ₹24. Your value = 500 × ₹24 = ₹12,000
- Fund B: NAV becomes ₹240. Your value = 50 × ₹240 = ₹12,000
Both give you exactly ₹12,000. The number of units doesn’t matter — what matters is the percentage growth. A fund with NAV ₹20 is not “cheaper” than one with NAV ₹200, just like a ₹10 stock isn’t necessarily cheaper than a ₹1,000 stock.
NAV vs Stock Price: Key Difference
Many people confuse NAV with stock prices, but they work differently:
A stock can trade above or below its intrinsic value due to market sentiment. But a mutual fund’s NAV always equals its true per-unit value — there’s no “discount” or “premium” (except in closed-end funds).
Does NAV Affect Your Returns?
No. Your returns depend entirely on how much the NAV grows in percentage terms, not its absolute value. Here’s what actually affects your mutual fund returns:
- Portfolio quality: What stocks/bonds the fund holds
- Fund manager skill: Stock selection and timing decisions
- Expense ratio: Lower expenses = more returns for you
- Market conditions: Overall market performance
- Investment horizon: Longer holding = better compounding
When Does NAV Matter?
NAV is relevant in these specific situations:
- Calculating units allotted: Units = Investment Amount ÷ NAV on purchase date
- Tracking fund performance: NAV growth over time shows fund returns
- Redemption value: Your payout = Units held × Current NAV
- Comparing same fund over time: NAV going from ₹100 to ₹150 = 50% return
When NAV Does NOT Matter
- Comparing two different funds (Fund A at ₹50 vs Fund B at ₹500)
- Deciding which fund to invest in
- Judging if a fund is “expensive” or “cheap”
- NFO (New Fund Offer) at ₹10 NAV is NOT a better deal than an existing fund at ₹100 NAV
The NFO Trap
Many investors rush to buy NFOs (New Fund Offers) because they launch at ₹10 NAV, thinking it’s “cheap.” This is a marketing trick. A new fund at ₹10 NAV with no track record is actually riskier than an established fund at ₹500 NAV with 10 years of proven performance. SEBI has repeatedly cautioned investors about this misconception through investor awareness campaigns.
How to Actually Choose a Mutual Fund
Instead of looking at NAV, focus on:
- Expense Ratio: Lower is better (direct plans have lower expense ratios)
- Past Performance: Compare 3, 5, 10-year returns against benchmark
- Consistency: Fund should perform well across market cycles
- Fund Category: Match to your risk profile and goals
- Fund Manager Track Record: Experience and tenure matter
FAQs
Should I wait for NAV to fall before investing?
No. Timing the market is nearly impossible. If you invest via SIP, you automatically buy more units when NAV is low and fewer when it’s high (rupee cost averaging). This removes the need to time your entry. Start your SIP today regardless of current NAV levels.
Why do two funds in the same category have different NAVs?
NAV depends on when the fund was launched and its historical performance. A fund launched in 2005 at ₹10 NAV that has grown well might have NAV of ₹500 today. A similar fund launched in 2020 at ₹10 might be at ₹18. Both could be equally good funds — the NAV difference just reflects different starting points and time periods.
Does dividend payout reduce NAV?
Yes. When a fund pays a dividend, the NAV drops by the dividend amount per unit. This is why dividend option doesn’t give you “extra” money — it’s your own money being returned. The growth option (where dividends are reinvested) is generally better for wealth creation as per AMFI guidelines.
Can NAV go to zero?
Theoretically possible but practically impossible for diversified mutual funds. NAV would only reach zero if every single stock in the portfolio became worthless simultaneously. SEBI regulations require diversification that makes this scenario virtually impossible for open-ended equity funds.
Related Articles
- What Is Expense Ratio in Mutual Funds?
- Direct vs Regular Mutual Funds: What’s the Difference?
- What Is SIP? A Beginner’s Guide to Systematic Investment Plans
- What Is CAGR? How to Calculate Investment Returns
- What Is an Index Fund? Should You Invest?
Conclusion
NAV is simply the per-unit price of a mutual fund calculated using a straightforward formula. It does NOT indicate whether a fund is cheap, expensive, good, or bad. A fund with ₹10 NAV is not a better deal than one with ₹1,000 NAV — your returns depend entirely on percentage growth, not absolute NAV. Stop comparing NAVs across funds, ignore the NFO “₹10 is cheap” marketing, and focus on what actually matters: expense ratio, past performance, and portfolio quality. As SEBI and AMFI consistently emphasize — mutual fund investments should be based on suitability, not NAV levels.