By Ashok Prasad, Founder, Niyyam
Published: March 2026
One of the most misunderstood concepts in mutual fund investing is NAV (Net Asset Value).
Many investors believe that a fund with a lower NAV is cheaper and therefore a better investment. Others assume that a high NAV means the fund is already “expensive” and may not grow much further.
Both assumptions are incorrect.
In reality, NAV has very little impact on your long-term returns, yet it continues to influence investor decisions in a major way.
Understanding how NAV works — and more importantly, what actually matters instead — can significantly improve the quality of your investment decisions.
In this guide, you will learn:
- What NAV is and how it is calculated
- Why does NAV not determine returns
- Common myths investors believe
- What you should focus on instead
- A practical framework to make better decisions
What is NAV in Mutual Funds?
NAV stands for Net Asset Value.
It represents the per-unit price of a mutual fund.
Whenever you invest in a mutual fund, you are buying units, and the NAV is the price at which those units are bought or sold.
If a fund has an NAV of ₹50, it means one unit of that fund costs ₹50.
How is NAV Calculated?
NAV is calculated using a simple formula:
NAV = (Total Value of Assets – Liabilities) ÷ Total Number of Units
Let’s break this down:
- Assets include stocks, bonds, and other securities held by the fund
- Liabilities include expenses, management fees, and other obligations
- Units are the total number of units held by investors
NAV is updated at the end of every trading day, based on the market value of the underlying assets.
Quick Reality Check About NAV
Before going deeper, it is important to understand a few key truths:
- NAV is just a price, not a measure of performance
- A lower NAV does not mean a fund is cheaper or better
- A higher NAV does not mean limited growth potential
- Returns are based on percentage growth, not NAV level
If you understand this clearly, you avoid one of the most common beginner mistakes.
The Biggest Myth: “Lower NAV Means Better Investment”
This is where most investors go wrong.
They compare funds like this:
- Fund A NAV = ₹20
- Fund B NAV = ₹200
And assume Fund A has more growth potential.
This is incorrect.
Mutual funds are not stocks.
Why NAV is Not Like Share Price
In stock investing:
- A lower price may indicate undervaluation
- A higher price may indicate overvaluation
But in mutual funds:
- NAV simply reflects the value of underlying assets
- It does not indicate whether the fund is cheap or expensive
For example:
If two funds grow by 10%:
- ₹20 NAV becomes ₹22
- ₹200 NAV becomes ₹220
In both cases, the return is the same.
Simple Example to Understand NAV Clearly
Let’s consider two investors:
Investor A
Invests ₹10,000 in a fund with NAV = ₹10
Units received = 1,000 units
Investor B
Invests ₹10,000 in a fund with NAV = ₹100
Units received = 100 units
Now assume both funds grow by 20%.
- Investor A → ₹12,000
- Investor B → ₹12,000
Despite different NAVs, returns are identical.
This clearly shows that NAV has no impact on wealth creation.
What Actually Determines Your Returns
Instead of NAV, your returns depend on:
- Performance of underlying assets
- Fund manager’s strategy and execution
- Market conditions
- Expense ratio and costs
These factors drive returns, not the NAV.
To understand the cost impact, refer to
What is Expense Ratio in Mutual Funds? How It Affects Your Returns (2026 Guide)
Understanding NAV in SIP Investing
NAV becomes even less relevant in SIP investing.
This is because SIP works on rupee cost averaging.
- When NAV is low → you buy more units
- When NAV is high → you buy fewer units
Over time, your cost gets averaged.
This reduces the importance of the entry price.
To understand this better, refer to
How SIP Builds Wealth Through Compounding (With Simple Examples)
NAV vs Fund Quality
A common misconception is linking NAV with quality.
Let’s compare:
Fund A
- NAV = ₹150
- Consistent performance
- Strong portfolio
Fund B
- NAV = ₹12
- Inconsistent returns
- Weak portfolio
Which is better?
Clearly, Fund A.
This proves:
NAV does not reflect quality or performance
Why High NAV Funds Are Not “Expensive”
Many investors avoid high NAV funds, thinking:
- Growth potential is limited
- It has already “run up.”
This is incorrect.
A fund’s future growth depends on:
- Market opportunities
- Portfolio composition
- Fund manager decisions
Not on its current NAV.
Why New Funds (Low NAV) Can Be Risky
New funds are typically launched with NAV = ₹10.
This creates a psychological illusion that they are “cheap”.
However:
- They have no performance history
- Strategy is untested
- Risk is higher
Choosing funds based on low NAV can lead to poor decisions.
Where NAV Actually Matters
NAV does have limited relevance in certain areas:
1. Buying and Selling Units
NAV determines your entry and exit price.
2. Tracking Portfolio Value
Your investment value is calculated using NAV.
3. Daily Fund Movement
NAV reflects daily changes in fund value.
Beyond this, NAV should not influence your decision.
Common Mistakes Investors Make with NAV
Investors often:
- Select funds based on the lowest NAV
- Avoid funds with high NAV
- Compare NAV across different categories
- Assume NAV indicates growth potential
These mistakes reduce long-term returns.
A Better Way to Evaluate Mutual Funds
Instead of focusing on NAV, ask:
- Is the fund consistent over time?
- Does it align with my financial goals?
- Is the risk level suitable?
- Are costs reasonable?
This approach leads to better investment outcomes.
Quick Decision Rule for Investors
Whenever you see NAV, remember this simple rule:
- NAV tells you the price, not the value
- Returns depend on percentage growth, not the starting point
- Focus on quality, not cost per unit
This one shift in thinking can improve your decisions significantly.
Real-World Insight
Consider two investors:
Investor A chooses funds based on low NAV.
Investor B chooses funds based on consistency, performance, and alignment with goals.
Over time:
- Investor A struggles with poor results
- Investor B builds stable and meaningful wealth
The difference is not knowledge.
The difference is understanding what truly matters.
Key Takeaways
- NAV is only a pricing mechanism
- It does not determine returns
- Lower NAV does not mean better investment
- Higher NAV does not limit growth
- Focus should always be on performance and consistency
Build a Smarter Investment Approach
If you want to understand how mutual funds generate returns and what actually drives performance, explore:
How Mutual Funds Generate Returns for Investors (With Simple Examples)
A deeper understanding helps you make better investment decisions.
Frequently Asked Questions (FAQs)
1. Is a low NAV better for investment?
No. NAV does not indicate whether a fund is good or bad.
2. Should I avoid high NAV funds?
No. High NAV funds can still deliver strong returns.
3. Does NAV affect SIP returns?
No. SIP works on cost averaging, making NAV less relevant.
4. What should I check instead of NAV?
Focus on performance, consistency, expense ratio, and risk profile.
Disclaimer
This content is for educational purposes only and does not constitute investment advice.
Mutual fund investments are subject to market risks. Investors should read all scheme-related documents carefully before investing and consider their financial goals, risk tolerance, and investment horizon.
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