What Is NAV in Mutual Fund and Does a Low NAV Mean a Better Fund?

ARTICLE OVERVIEW

What this article covers:

• What NAV actually is — in an easy way
• How NAV is calculated with a real formula + example
• The biggest NAV myth that most beginners fall for (low NAV = cheap fund)
• Why two funds with very different NAVs can give the same returns
• What you should actually look at instead of NAV when choosing a fund

When you start investing in mutual funds, one of the first numbers you’ll notice is NAV. And almost every new investor at some point asks the same question: “Should I pick the fund with a lower NAV? Sounds cheaper, right?” It sounds logical. But this is one of the most common mutual fund myths in India, and it costs people some genuinely good investment decisions. What is NAV in mutual fund, and does a low NAV really mean a better or cheaper fund? Let’s clear this up once and for all.

What is NAV in Mutual Fund?

NAV stands for Net Asset Value. In simple terms, it’s the price of one unit of a mutual fund on any given day.

Think of it this way. When you invest in a mutual fund, you’re not buying shares of a company directly. You’re buying units of that fund. The price of each unit on that specific day is called Net Asset Value (NAV).

Every mutual fund calculates its NAV at the end of each trading day, after the market closes. SEBI (Securities and Exchange Board of India) mandates that all AMCs publish their NAV daily on the AMFI India website.

NAV Formula: How It’s Calculated

The formula is simple:

NAV (Net Asset Value) = (Total Assets – Total Liabilities) ÷ Total Outstanding Units

Where:

• Total Assets = Market value of all securities, cash, and other investments held by the mutual fund.
• Total Liabilities = Fund expenses, management fees, and other payable obligations.
• Total Outstanding Units = Total mutual fund units currently held by investors.

Let’s make this real with an example.

So on that day, each unit of this fund costs ₹99. That’s the NAV.

How NAV Changes Every Day

The stocks and bonds that a mutual fund holds keep changing in value every day, because the stock market is open. So the total assets of the fund change daily, which means the NAV changes daily.
If the fund’s underlying stocks go up on a given day, the NAV goes up. If they fall, the NAV drops. This is expected.

This is different from a Fixed Deposit, where your balance stays fixed. In mutual funds, the value of your units fluctuates with the market — that’s the nature of the investment.

NAV Myth: Low NAV Does Not Mean a Cheaper Fund

This is where most beginners go wrong. The thought process sounds reasonable: “Fund A has a NAV of ₹15 and Fund B has a NAV of ₹150, so Fund A is cheaper, and I’ll get more units for the same money.”

While it is true that a lower NAV allows you to buy more units, that does not mean the fund will generate higher returns. The number of units you own is not important. What matters is how much your investment grows over time.

In mutual funds, returns are based on the fund’s percentage growth, not on its NAV. A fund with a NAV of ₹20 and a fund with a NAV of ₹200 can deliver the same return if both grow by the same percentage. This is why a lower NAV should never be the reason for choosing a mutual fund. Instead, focus on factors such as the fund’s performance, portfolio quality, risk level, and consistency.

Real Example for easy understanding:

Suppose you invest ₹10,000 in each of two funds.

Both funds grew 20%. Both gave you ₹12,000 on a ₹10,000 investment. Fund A gave 10x more units but the same rupee return. The number of units is irrelevant. What matters is how much the fund grew.

High NAV in Mutual Funds: What Investors Should Know

A high NAV means the fund has been around longer and has grown steadily over the years. That’s it.

A fund that started in 2005 with a NAV of ₹10 and is now at ₹850 has delivered 85x returns over 20 years. That’s a fund you’d want to be in, not avoid because the NAV looks expensive.

A brand new fund launching at ₹10 isn’t ‘cheaper’. It’s just newer. And newer isn’t always better.

What You Should Actually Look at Instead of NAV

If NAV isn’t the metric to judge a fund by, what should you look at? Here’s what actually matters:

• 3-year and 5-year returns: How consistently has the fund grown across different market cycles? One good year doesn’t count for much.
• Expense ratio: The annual fee the fund charges you. A lower expense ratio means more of your money is working for you. We cover this in detail in our guide to the expense ratio in a mutual fund.
• Fund manager track record: Has the manager navigated a market downturn before? Experience during volatility matters.
• AUM (Assets Under Management): Very small funds (under ₹100 crore) can be operationally volatile. Very large mid-cap or small-cap funds can struggle with liquidity.
• Benchmark comparison: Is the fund consistently beating its benchmark index? If not, you may be better off with an index fund.

NAV and SIP — Does It Matter When You Start?

When you invest through SIP (Systematic Investment Plan), your money buys units at whatever the NAV is on that specific date, every month. Some months you’ll buy at a higher NAV, some months at a lower NAV.

This is exactly how SIP is designed to work. It averages out your purchase cost over time, a concept called Rupee Cost Averaging. Because of this, waiting for a lower NAV before starting a SIP usually does not make much sense for long-term investors. If you’re new to mutual funds, you can learn how to invest in mutual funds online before starting your first SIP.

NFO NAV Misconception Investors Should Avoid

You’ve probably seen ads saying: “Invest now at NAV of just ₹10!” — This is an NFO (New Fund Offer).

Many investors rush into NFOs thinking ₹10 is a bargain. But remember, a ₹10 NAV on a brand new fund with zero track record is not better than a ₹500 NAV on a fund with a proven 10-year history.

The ₹10 NFO NAV is simply the starting value of the fund and does not indicate higher return potential. According to SEBI’s guidance for mutual fund investors, investment decisions should be based on factors such as the fund’s objective, portfolio, risk level, and track record rather than its NAV alone.

FAQs (Frequently Asked Questions)

Q. 1 What is NAV in a mutual fund in simple words?

NAV is the price of one unit of a mutual fund on a given day. It’s calculated by dividing the total value of the fund’s assets (minus liabilities) by the total number of units issued. It changes every day based on market performance.

Q. 2 What is NAV, and is a fund with low NAV good?

NAV is the per-unit price of a mutual fund. Low NAV does not mean a cheaper or better fund. What matters is the fund’s growth percentage, not the NAV number itself. A ₹15 NAV fund and a ₹150 NAV fund will grow both at 20%, and you will get the same return.

Q. 3 Does a higher NAV mean a better mutual fund?

Not necessarily. A higher NAV usually means the fund is older and has grown over the years. But it doesn’t automatically mean it will continue to outperform. Always look at consistent past returns, expense ratio, and fund manager track record, not just NAV.

Q. 4 Should I invest when the NAV is low?

If you’re doing SIP, you don’t need to time the NAV. Your money will automatically buy more units when the NAV is low and fewer when it’s high, which averages out your cost over time. For a lump sum, market conditions matter more than the NAV number.

Q. 5 What happens to NAV when I redeem my mutual fund?

When you redeem (withdraw) your mutual fund units, you receive the NAV of that day multiplied by the number of units you’re selling. If the NAV has grown since you invested, you make a profit. If it has fallen, you incur a loss.

Q. 6 Is it profitable to invest in NFO at ₹10 NAV?

Not always. A ₹10 NAV on an NFO just means it’s a new fund; there’s no past performance to judge it by. An established fund with a ₹300 NAV and a strong 7-year track record is often a safer choice than an NFO at ₹10 with no history.

Conclusion

NAV is just the price tag on a mutual fund unit for that day. A lower number doesn’t make a fund cheaper or more profitable, just like a ₹200 stock isn’t always a better buy than a ₹2,000 stock.
What actually builds wealth is the fund’s consistent performance, low expense ratio, and your patience to stay invested through market cycles.

Next time someone tells you to pick the ₹10 NAV fund over the ₹500 one, you’ll know exactly what to say. And if you’re ready to take the next step, learn how to invest in mutual funds online or understand what a mutual fund actually is before you invest your first rupee.

Disclaimer

This article is for educational purposes only and does not constitute financial or investment advice. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully and consult a qualified financial advisor before making any investment decisions.