When it comes to mutual fund investing, one of the most misunderstood terms among investors is Net Asset Value, commonly known as NAV. Many people believe that a mutual fund with a lower NAV is “cheap” and offers better profit potential, while a fund with a higher NAV is considered “expensive.” This misconception often leads investors to avoid high-NAV funds or panic and exit when the NAV falls during market corrections—especially in SIP investments.
In reality, NAV has a very limited connection with the success or failure of your mutual fund investment. To make informed decisions, investors must understand not just what NAV is, but also what it actually represents—and what it does not.
NAV represents the per-unit value of a mutual fund’s portfolio. It is calculated by taking the total value of all assets held by the fund, subtracting its expenses and liabilities, and dividing the result by the total number of outstanding units.
NAV Formula:
NAV = (Total Assets – Total Liabilities) ÷ Total Units
For example, if a mutual fund holds assets worth ₹2,550 crore, has expenses and liabilities of ₹50 crore, and has issued 125 crore units, the NAV of the fund would be ₹20 per unit.
This clearly shows that NAV is not a market price like a stock. Instead, it is an accounting outcome based on the value of the fund’s underlying investments. Investors buy and sell mutual fund units at NAV, but NAV itself does not indicate whether a fund is good or bad.
This is one of the most common myths in mutual fund investing. A lower NAV does not mean higher returns, and a higher NAV does not mean lower future growth.
Consider two equity mutual funds with similar portfolios and performance. One fund was launched in 2004 with an NAV of ₹10, while the other was launched in 2019 with an NAV of ₹100. If both funds generate an annual return of 12%, the older fund will naturally have a much higher NAV today because it has compounded for a longer period. This does not make it expensive, nor does it make the newer fund cheaper. Investors in both funds earn returns based on percentage growth, not the NAV number.
Many investors panic when they see daily fluctuations in NAV. However, NAV changes for three main reasons:
1. Market Movements:
The prices of shares and bonds held by the fund change daily. If the value of these securities rises by 1%, the NAV also increases by around the same margin. When markets fall, NAV declines accordingly.
2. Expenses and Fees:
Mutual fund expenses, known as the expense ratio, are deducted daily from the NAV. For example, an annual expense ratio of 1.5% translates into a small daily reduction, which may seem negligible but can impact long-term returns.
3. Dividend Payouts:
When a fund pays dividends, the NAV falls by the same amount. If a fund with an NAV of ₹60 pays a ₹4 dividend, the NAV drops to around ₹56. This is not a loss—the money has simply been paid out to investors in cash.
For SIP investors, a falling NAV is not a cause for worry—in fact, it can be an advantage. The number of units you receive in an SIP depends on the NAV on the investment date.
Units = SIP Amount ÷ NAV
If you invest ₹5,000 through SIP when the NAV is ₹50, you receive 100 units. If the NAV drops to ₹40 due to market correction, the same ₹5,000 fetches 125 units. Over time, this rupee cost averaging helps reduce the average purchase cost and improves long-term returns.
When markets fall sharply and NAV declines, many investors fear that something is wrong with the fund. In reality, NAV simply reflects current market prices—not the long-term strength of the fund.
Market downturns are often temporary. Investors who exit solely due to falling NAV end up locking in losses, while those who stay invested benefit when markets recover.
While NAV should not be used to select a fund, it is important in certain situations. All return calculations—such as absolute return and CAGR—are based on the difference between purchase NAV and redemption NAV. Taxes on capital gains and exit loads are also calculated using NAV values at the time of redemption.
Rather than chasing low NAV funds, investors should evaluate:
The fund’s performance across different market cycles
How well it limits losses during market downturns
The quality and diversification of its portfolio
Whether the returns justify the fund’s expense ratio
NAV is just a number, not a measure of profitability or value. A low NAV does not guarantee higher returns, and a high NAV does not mean a fund is overpriced. For SIP investors especially, understanding NAV correctly helps avoid panic-driven decisions. Long-term discipline, consistent investing, and focusing on fund quality—not NAV—are the real keys to successful mutual fund investing.
Disclaimer: This article is for informational purposes only. Mutual fund investments are subject to market risks. Investors should consult a qualified financial advisor before making any investment decisions.
