Understanding NAV in Mutual Funds: Why a Lower NAV Doesn’t Mean ‘Cheaper’

If you have ever caught yourself scrolling through mutual fund options on your investment app, you might have noticed a number called NAV. You might have seen a new fund launching at an NAV of just ₹10, while an older, established fund boasts an NAV of over ₹1,000.

If your first thought was, “I should buy the ₹10 fund because it’s cheaper and has more room to grow,” you are not alone. It is one of the most common assumptions made by retail investors in India. We naturally equate “lower price” with “better value.” After all, if you buy something at ₹10, it seems much easier for it to double to ₹20 than for a ₹1,000 fund to double to ₹2,000.

However, in the world of mutual funds, this logic completely breaks down. Let’s dive deep into understanding what NAV really is and why a lower NAV does not mean a mutual fund is “cheaper” or better.

What Exactly is NAV?

NAV stands for Net Asset Value. In simple terms, it represents the price of a single unit of a mutual fund.

When you invest money in a mutual fund, the fund house pools your money with that of thousands of other investors. The fund manager then invests this massive pool of money into a portfolio of stocks, bonds, or other securities. At the end of every trading day, the fund calculates the total value of all its investments, subtracts any expenses or liabilities (like the fund management fee), and divides the remaining amount by the total number of units issued to investors.

The result? The Net Asset Value (NAV).

Formula for NAV: (Total Value of Assets - Total Liabilities) / Total Number of Outstanding Units

Think of a mutual fund like a massive pizza. The NAV is simply the price of one slice of that pizza. Whether the pizza is cut into 10 slices or 100 slices, the total size of the pizza remains exactly the same.

The Myth of the “Cheaper” NFO

The myth that a lower NAV is better usually rears its head during New Fund Offers (NFOs). When an AMC (Asset Management Company) launches a new mutual fund, it typically starts with a base NAV of ₹10.

Investors flock to these NFOs thinking they are getting in on the ground floor. They think, “I can buy 1,000 units for just ₹10,000! If I put that same ₹10,000 into an older fund with an NAV of ₹500, I’ll only get 20 units.”

Psychologically, owning 1,000 units feels a lot better than owning 20 units. It feels like you own more. But the reality is that the number of units you hold has absolutely no bearing on your returns.

The Math: Why Only Percentage Returns Matter

To truly understand why NAV doesn’t matter, let’s look at a simple mathematical example.

Imagine you have ₹10,000 to invest. You are considering two mutual funds that both invest in the exact same top 50 companies of India (like a Nifty 50 Index Fund).

• Fund A (The “Cheap” Fund): Has an NAV of ₹10.
• Fund B (The “Expensive” Fund): Has an NAV of ₹100.

You invest your ₹10,000 into both funds (let’s say hypothetically, you have ₹20,000 total).

• In Fund A, you get 1,000 units (10,000 / 10).
• In Fund B, you get 100 units (10,000 / 100).

Over the next year, the stock market performs brilliantly, and the underlying portfolio of both funds grows by 20%.

Let’s see what happens to your investment:

• Fund A’s NAV grows by 20%, moving from ₹10 to ₹12.
• Fund B’s NAV grows by 20%, moving from ₹100 to ₹120.

Now, let’s calculate the final value of your investments:

• Your value in Fund A: 1,000 units × ₹12 = ₹12,000
• Your value in Fund B: 100 units × ₹120 = ₹12,000

Surprised? Despite Fund A having a “cheaper” NAV, both funds generated the exact same profit of ₹2,000. Your wealth grew by 20% in both scenarios because your returns are determined by the performance of the underlying stocks, not the starting NAV.

A High NAV Actually Tells a Story of Success

Rather than being scared of a high NAV, you should actually view it with respect.

If you look at some of the oldest equity mutual funds in India—like Nippon India Growth Fund, HDFC Flexi Cap Fund, or Franklin India Prima Fund—you will see NAVs running into hundreds or even thousands of rupees.

Why is their NAV so high? Because they have been compounding wealth for their investors for decades. An NAV of ₹1,500 simply means that a fund that started at ₹10 many years ago has grown its investors’ money substantially over time. It is a testament to the fund’s survival through market crashes, economic slowdowns, and changing political landscapes.

When you chase a ₹10 NFO just because it is “cheap,” you are often buying into a fund with zero track record. You don’t know how the fund manager handles market volatility, whereas a fund with a ₹500 NAV has a proven, verifiable history.

What Should You Actually Look For?

If NAV is irrelevant, what should you be looking at when selecting a mutual fund for your financial goals? Here are the metrics that actually matter:

1. Rolling Returns and Consistency

Don’t just look at how a fund performed last year. Look at its rolling returns over 3, 5, and 10-year periods. Has it consistently beaten its benchmark index? Consistency is far more important than a one-time spike in performance.

2. Expense Ratio

This is the fee the Asset Management Company charges to manage your money. A higher expense ratio eats directly into your long-term returns. When choosing between two similar funds (especially index funds), always prefer the one with the lower expense ratio.

3. Portfolio and Asset Allocation

What exactly is the fund investing in? Does it hold stable, large-cap blue-chip companies, or is it taking high risks with small-cap stocks? Make sure the fund’s risk profile aligns with your personal risk tolerance and time horizon.

4. Fund Manager’s Experience

A mutual fund is only as good as the person managing it. Check how long the current fund manager has been at the helm. A sudden change in management can sometimes alter the fund’s strategy and future performance.

5. Your Own Financial Goals

Are you saving for a downpayment on a house in 3 years, or are you building a retirement corpus for 20 years from now? Your goals dictate whether you should be in a liquid fund, a hybrid fund, or a pure equity fund.

The Bottom Line

Investing in mutual funds is one of the most powerful ways to build wealth in India today. But to truly benefit from it, we have to unlearn some of the biases we carry over from the stock market or everyday shopping.

In the supermarket, a cheaper item might save you money. But in mutual funds, a lower NAV does not give you a better deal. A ₹10 NAV fund and a ₹1,000 NAV fund that invest in the exact same portfolio will give you the exact same percentage returns.

So the next time a friend or a relative tells you they are investing in a new fund just because the NAV is ₹10, you can gently correct them. Share the pizza analogy. Remind them that it is the quality of the underlying assets—the toppings on the pizza, if you will—that matters, not how many slices it has been cut into. Focus on the fund’s track record, its expense ratio, and your own long-term goals. That is the true path to smart, sustainable wealth creation.

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