Low NAV doesn't mean a cheaper fund

Summary: Do you look at a fund’s NAV before investing? Here’s why low NAVs don’t imply that a fund is cheap and the metrics you should consider instead.

“Just Rs 10 per unit.” Few lines sell a new mutual fund as effectively as this one. The suggestion is subtle but powerful: a low NAV (net asset value) means the fund is cheap and buying early could mean bigger gains. It is an argument that sounds intuitive, which is precisely why so many investors fall for it during NFO (new fund offer) season.

The reality is far less exciting. A fund’s NAV tells you nothing about how ‘cheap’ or ‘expensive’ it is and has no bearing on the returns you will earn. Two funds holding the same portfolio will deliver identical returns, regardless of whether one starts at Rs 10 and the other at Rs 50. What matters is what the fund owns and how it performs over time, not the number printed as its NAV.

Suggested read: Getting the basics right

Let's take the above example again. Suppose the NAVs of the two funds are Rs 10 and Rs 50, and they rise to Rs 11 and Rs 55, respectively. So it might appear that one has just risen by a rupee while the other by Rs 5, but both have risen by 10 per cent.

Of course, the number of units held would differ. A low NAV would imply a higher number of units and a high NAV would indicate a lower number of units. So let's say you invest Rs 5,000. It would get you 500 units with an NAV of Rs 10 but only 100 units if the NAV is Rs 50 (assuming no entry load).

Yet in both cases, the value of the investment is identical. So Rs 5,000 invested in each would show the same gain. The 500 units (for which you paid Rs 10/unit) would rise to Rs 5,500 at Rs 11 per unit. The 100 units (for which you paid Rs 50/unit) would rise to Rs 5,500 at Rs 55 per unit.

The 'cost' of a scheme in terms of its NAV has nothing to do with returns. What you want to look for in a scheme is its performance, not its NAV.

Suggested read: What causes the difference in NAVs of mutual funds? 

The only instance where a higher NAV may adversely affect you is when a dividend has to be received. This happens because a scheme with a higher NAV will result in fewer units. As dividends are paid out on face value, a higher NAV will result in lower absolute dividends due to the smaller number of units.

But even here, total returns will remain the same. So, from whichever angle you see it, the NAV makes no difference to returns. Mutual fund schemes have to be judged on their performance. And the simplest way to do this is to compare returns over similar periods.

The confusion over NAV arises simply because investors view a fund's NAV like a stock price. Nothing could be farther from the truth. The current price of a stock could be much lower or higher than its actual value. But the NAV just reflects the current value of the portfolio as it is.

The next time you are evaluating a fund, take a good look at the portfolio and returns over various time periods. Remember, it is the stocks that the fund manager has invested in that determine the returns. The value of the NAV is immaterial.

This article was originally published on September 30, 2020, and last updated on December 15, 2025.