Chapter 3 of 15
How NAV Works
Net Asset Value, unit allotment, and why lower NAV ≠ cheaper fund.
Ganesh had just opened Groww and was comparing two funds.
Fund A: Axis Bluechip Fund. NAV: ₹567. Fund B: Nippon India Growth Fund. NAV: ₹3,847.
"Obviously Fund A is better value," he typed to Vikram. "NAV ₹10 means it's cheap, right? Like shares?"
Vikram sent back a single message: "Bro you are so wrong. Read this."
NAV is the price of one unit of a mutual fund. It's calculated daily by dividing the total market value of all the fund's investments (minus expenses) by the number of units outstanding.
The Biggest NAV Misconception in India
Let's kill this myth immediately.
A lower NAV does NOT mean the fund is cheaper, better value, or has more upside.
A higher NAV does NOT mean the fund is expensive or overpriced.
NAV is simply what one unit is worth today. It reflects the fund's history, how long it's existed and how well it's performed. That's all.
Buying a fund at NAV ₹10 vs NAV ₹500 doesn't change what returns you'll earn going forward. The returns are determined by what happens to the fund's investments, not by what you paid for the units.
So How Is NAV Actually Calculated?
Every evening, after the markets close, each mutual fund does this calculation:
NAV = (Total Market Value of All Holdings - Expenses and Liabilities) ÷ Total Number of Units
Let's make this concrete.
Imagine a small mutual fund with this portfolio:
Holdings: ₹50 crore in stocks (current market value) Other assets (cash, T-bills): ₹2 crore Total liabilities (expenses accrued): ₹50 lakh
Net assets = ₹52 crore - ₹0.5 crore = ₹51.5 crore
Total units issued to all investors: 1 crore units
NAV = ₹51.5 crore ÷ 1 crore = ₹51.50
So each unit is worth ₹51.50 today. If you own 100 units, your investment is worth ₹5,150.
Tomorrow, if the stocks in the portfolio go up by 2%, the total value becomes ₹52.53 crore. NAV becomes ₹52.53. Your 100 units are now worth ₹5,253.
Why Does NAV Change Daily?
Because the underlying investments change in value every day the market is open.
If the stocks in the fund go up → NAV goes up. If the stocks fall → NAV falls. If dividends are paid → NAV drops by the dividend amount (because cash left the fund).
On market holidays, NAV doesn't change. On weekends, NAV is the same as Friday.
When you submit a SIP or lump sum before 3 PM on a business day, you get that day's NAV. After 3 PM, you get the next day's NAV.
Stock prices change every second during market hours. NAV is calculated just once, after 3:30 PM market close. That's why mutual funds say you get "same-day NAV" for transactions submitted before the cutoff time (usually 3 PM for equity funds).
Back to Ganesh's Confusion: Fund A at ₹567 vs Fund B at ₹3,847
Let's trace the real comparison.
Fund A (NAV ₹567): This fund started in 2012. ₹10,000 invested in 2012 is now worth ₹56,700. That's a 467% return.
Fund B (NAV ₹3,847): This fund started in 2003. ₹10,000 invested in 2003 is now worth ₹3,84,700. That's a 3,747% return.
Which fund has done better? Obviously Fund B, by a massive margin. But Fund B's NAV is "higher", which is exactly why Ganesh initially thought it was the expensive one. He had it backwards.
Higher NAV = more historical growth. It's a badge of performance, not a sign that the fund is "overpriced."
Ganesh invests ₹10,000 in Fund A (NAV ₹100). He gets 100 units. His friend Priya invests ₹10,000 in Fund B (NAV ₹500). She gets 20 units.
Both funds grow by 20% over the next year.
Fund A NAV becomes ₹120. Ganesh's 100 units are worth ₹12,000. Fund B NAV becomes ₹600. Priya's 20 units are worth ₹12,000.
Same money in. Same percentage growth. Same money out. The starting NAV was irrelevant.
What Actually Matters When Picking a Fund?
Since NAV tells you nothing about value, what should Ganesh look at?
1. CAGR returns over 3, 5, and 10 years Past performance isn't guaranteed to repeat, but it shows you what the fund has managed across different market cycles.
2. Expense ratio The annual fee charged by the fund. A 0.1% expense ratio vs 1.5%, over 20 years, this difference compounds into a lot of money.
3. Fund manager track record Who's running the fund? How long have they been at this AMC? What's their history across different funds?
4. AUM (Assets Under Management) Too small (under ₹500 crore) can be risky, fund might merge or close. Too large for a small-cap fund can hurt performance (hard to invest in small stocks at scale).
5. Risk metrics Standard deviation, Sharpe ratio, alpha, beta, these tell you how much risk was taken to generate the returns. A fund returning 15% with 30% volatility is worse than one returning 14% with 15% volatility.
| Metric | What it tells you | Good sign |
|---|---|---|
| NAV | History of the fund (not value) | Irrelevant for picking |
| CAGR (5-year) | Annualized historical return | Consistent, above benchmark |
| Expense ratio | Annual fee charged | Lower is better |
| Sharpe ratio | Return per unit of risk | Higher than 1 is good |
| AUM | Total fund size | Not too small, not too large for category |
| Alpha | Return above benchmark | Positive alpha over multiple years |
One More Misconception: "NFO at ₹10 NAV Is a Great Deal"
New Fund Offers (NFOs) often launch at ₹10 NAV. Many investors think this is a bargain, "ground floor opportunity!"
It's not. The fund has no track record at ₹10. You have zero data on how this fund manager performs in different market conditions. You're essentially buying blind.
An established fund with NAV ₹800 and a strong 10-year track record is infinitely better than a new fund at ₹10 with no history.
In an IPO, you're buying shares before they list on the market, there's a genuine potential for a listing pop. In an NFO, you're just buying units in a new fund at a fixed ₹10 NAV. The ₹10 has no special significance. Don't let the "ground floor" narrative fool you.
How Does Ganesh's Money Grow Then?
If NAV isn't what creates returns, what does?
Returns come from:
- Stock price appreciation. If the fund holds Infosys and Infosys stock goes up, the fund's NAV rises.
- Dividends from companies. If the companies in the fund pay dividends, that cash adds to fund value (in growth option).
- Compounding over time. As NAV grows, the same number of units becomes worth more, which then grows more. Compound growth.
The NAV number just tracks all of that. It's the scoreboard, not the game.
Key Takeaways
- NAV is simply the per-unit price of the fund: calculated daily from the fund's holdings
- Lower NAV ≠ cheaper fund. Higher NAV ≠ expensive fund. NAV reflects history, not value.
- The returns you earn depend on the fund's future performance, not the starting NAV
- Ignore NAV when picking a fund; focus on CAGR, expense ratio, and risk metrics
- NFOs at ₹10 are NOT bargains: they have no track record and carry higher uncertainty
- Same investment, same growth % = same rupee return, regardless of NAV
Now that NAV makes sense, go deeper:
- How to read a mutual fund factsheet
- Understanding returns: CAGR vs XIRR vs absolute
- Types of mutual funds
Fund X has NAV ₹10 (new fund). Fund Y has NAV ₹800 (10 years old, good track record). Ganesh has ₹20,000. Which is a better investment?
Disclaimer: This article is for educational purposes only and does not constitute personalized financial advice. Investments are subject to market risks. Past performance does not guarantee future returns. Please consult a SEBI-registered investment adviser before making investment decisions.