A commonly misunderstood aspect of mutual fund investing is the Net Asset Value (NAV). 

There is a belief that ‘if funds have a lower NAV, it is cheaper.’ There are also those who feel hesitant to go into a fund because its NAV ‘is a bit too high.’ Then there is panic redemption because of sudden downturns in funds’ NAV during times of volatile markets.

It’s ironic that NAV is of little consequence to your mutual fund investment’s success or failure. To truly understand NAV, one must move beyond definitions and look at what NAV represents in practice—and what it does not.

NAV is a Result, Not a Starting Point

NAV reflects the per-unit value of a mutual fund’s portfolio after accounting for expenses. It’s calculated at the end of every trading day using the closing prices of the securities held by the fund.

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The formula is straightforward:

NAV=Total Assets-Total LiabilitiesTotal Outstanding Units

Suppose a mutual fund holds shares and cash worth Rs 1,020 crore. Its expenses and liabilities amount to Rs 20 crore. If the fund has issued 100 crore units, the NAV will be:

NAV=1,020-20100=Rs 10

This calculation highlights an important truth: NAV is an accounting outcome, not a price determined by demand and supply like stocks. Investors transact at NAV, but they do not influence it.

Why a High NAV Is Not a Sign of Expensiveness

One of the most persistent myths in mutual fund investing is that funds with lower NAVs offer more upside. This belief largely comes from how stocks are perceived, but the comparison is misplaced.

Consider two equity mutual funds with identical portfolios and performance:

  • Fund A was launched in 2004 with an initial NAV of Rs 10
  • Fund B was launched in 2019 with an initial NAV of Rs 100

If both funds deliver a 12% annual return, fund A’s NAV will naturally be much higher today because it has compounded for a longer period. This does not make fund A “expensive” or fund B “cheap.” Both investors earn the same percentage return on their invested capital.

How NAV Moves on a Daily Basis

NAV changes every day, and these movements are often misinterpreted. In reality, NAV fluctuations are driven by three key factors.

  1. Market Value of Underlying Securities

When the stock or bond prices in the fund’s portfolio rise, the fund’s total assets increase, pushing NAV higher. Similarly, market corrections reduce NAV. If a fund’s equity portfolio rises by 1% in a day and expenses remain unchanged, the NAV will also rise by roughly 1%.

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  1. Expenses and Fees

Mutual fund expenses are not deducted annually in one shot. They are adjusted daily.

For example, if a fund has an expense ratio of 1.5% per year:

Daily expense impact=1.5%365=0.0041%

This small daily deduction quietly reduces NAV over time, which is why expense ratios have a meaningful long-term impact on returns.

  1. Dividends and Distributions

When a fund pays a dividend, the NAV falls to the extent of the payout.

If a fund with a NAV of Rs 60 declares a dividend of Rs 4 per unit, the NAV will drop to approximately Rs 56 after the payout. This drop is often mistaken as a loss, even though the investor has received Rs 4 in cash.

NAV and SIPs: Where Volatility Helps You

For SIP investors, NAV volatility is not something to fear—it is something to embrace.

The number of units you receive in an SIP depends on the NAV on the investment date:

Units alloted=SIP amountNAV

If you invest Rs 10,000 monthly:

  • At NAV Rs 50 → 200 units
  • At NAV Rs 40 → 250 units

When markets correct and NAVs fall, SIP investors accumulate more units. Over time, this averaging effect improves return potential when markets recover. This is why experienced investors focus more on staying invested than on short-term NAV movements.

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NAV During Market Corrections: A Test of Behaviour

Sharp declines in NAV often trigger emotional decisions. Investors see their portfolio value drop and assume something is fundamentally wrong with the fund.

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However, NAV reflects current market prices, not long-term intrinsic value. A fall in NAV during a broader market correction does not automatically mean the fund has failed. In many cases, it simply reflects temporary market sentiment.

Investors who redeem based solely on falling NAVs often lock in losses, while those who remain invested benefit from eventual recovery.

When NAV Actually Matters

While NAV should not guide fund selection, it does play a role in certain aspects of investing.

  1. Calculating Returns

All mutual fund returns—absolute, CAGR, or rolling—are derived from NAV changes.

Absolute return=Ending NAV-Beginning NAVBeginning NAV

CAGR=Beginning NAVEnding NAV​1/n-1

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  1. Taxation at Redemption

Capital gains tax is calculated using the purchase NAV and redemption NAV. The difference determines your taxable gain.

  1. Exit Load

Exit loads, if applicable, are charged on the redemption value calculated using NAV.

What Investors Should Focus on Instead of NAV

Rather than asking whether a fund’s NAV is high or low, investors are better served by asking:

  • How consistent has the fund been across market cycles?
  • Does the portfolio align with current economic conditions?
  • How has the fund handled downside volatility?
  • Are returns justifying the expense ratio?

The Bottom Line

NAV is an essential metric, but it’s often given more importance than it deserves. It tells you what a fund is worth today, not whether it’s a good or bad investment.

A high NAV does not limit future returns, and a low NAV does not guarantee growth. What truly matters is the quality of the underlying portfolio, the discipline of the fund manager, and the investor’s ability to stay invested through market cycles.

In mutual fund investing, NAV is a mirror it reflects value. It’s not a compass that guides returns.

Invest wisely.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here…

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