The low NAV myth: why a ₹15 fund isn't cheaper than ₹500

The belief

"This fund's NAV is only ₹18. That one is ₹640. Surely the ₹18 one has more room to grow." It sounds like common sense, borrowed from shares, where a ₹18 stock can feel more affordable than a ₹6,400 one. For mutual funds it is wrong, and the mistake can steer you into a worse fund.

The NAV is the fund's net assets divided by the number of units. It is a per-unit price with no meaning on its own. This post shows why, using arithmetic you can check, and then what to look at instead.

The arithmetic

Put ₹50,000 into two funds, one at a NAV of ₹25 and one at ₹2,500. Both portfolios then rise 12%.

Same gain, to the rupee. The fund with more units is not "cheaper" and the one with fewer is not "expensive". The number of units is an accident of the price.

If anything, the difference between the two is the past, not the future. Fund B probably has a NAV of ₹2,500 because it has existed for a long time and compounded, or because it is a plan that never paid out. Fund A is likely younger. Neither tells you which will do better from here.

Why NAVs differ so much

• Launch date. Every fund starts at ₹10. A fund that has run twenty years at a good return has a high NAV. See what is NAV.
• Growth vs payout. In the IDCW option, each payout comes out of the NAV. If a fund at ₹100 pays ₹5, the NAV drops to ₹95 on the record date. You received ₹5 in cash and the NAV fell ₹5; you are no better off. The growth vs IDCW guide explains why payouts are not "free income".
• Plan type. The Direct and Regular plans of one scheme have different NAVs, because the Direct plan's lower expense ratio lets its NAV grow a little faster. A higher Direct NAV does not mean it is more expensive. See direct vs regular plans.
• Category. A debt or liquid fund can sit at ₹1,000 or ₹3,000 because it has accumulated modest returns for years; an equity fund launched recently may still be near ₹10 to ₹15.

None of these has anything to do with value for money.

Where the myth comes from

Three things feed it.

1. Shares. A stock's price against its earnings (its P/E) can say something about value; a stock at ₹18 is not "cheaper" than one at ₹6,400 either, but a stock price is at least linked to a single company's numbers. A fund's NAV is the sum of dozens of holdings divided by an arbitrary count of units.

2. NFOs. New fund offers are sold at ₹10, and the pitch leans on that "low price". We look at it in should you invest in an NFO.

3. Round-number thinking. Buying 1,000 units feels like owning more than buying 20. It is the same money.

What to look at instead

If NAV does not tell you anything, what does? The honest list is short and findable on any fund page:

1. Returns over several periods, stated as CAGR for periods over a year, not a single recent figure. The rolling returns guide shows why one window misleads, and CAGR is defined in our glossary.
2. Cost. The expense ratio, and whether you are in a Direct plan. See what a fund really costs.
3. Risk. The riskometer and how far the fund has fallen in bad times: the riskometer guide.
4. Category fit. Is it the right kind of fund for your goal and date? See the five questions.
5. Consistency and the manager. Is the record stable, and has the manager changed? Our fund manager changes guide covers that.

Our screener and compare tool show these side by side, and the factsheet guide explains where each number comes from.

When NAV does matter, a little

NAV has two honest uses.

• Computing your holding. Units times NAV is your balance. Your own gain is the change in NAV between your purchase and today, and it is what the XIRR calculator works with for a SIP.
• Checking a payout. After an IDCW payout, the NAV drop equals the payout, which is a sanity check.

There is one more subtlety: the NAV a SIP buys at is that day's NAV, struck once a day after the market closes. Timing within the day changes nothing; see cut-off timings.

A related trap is judging a fund by a "big jump" in NAV. A rise from ₹40 to ₹44 and a rise from ₹400 to ₹440 are both 10%. Always convert to a percentage before comparing, and compare over the same dates. The same goes for a fall: a fund that drops ₹50 from ₹1,000 has lost 5%, the same as one that drops ₹5 from ₹100.

A quick test you can run

Take any two funds in the same category. Ignore their NAVs. Instead:

• Compare their returns over three and five years, with the same start and end dates.
• Compare the expense ratios of their Direct plans.
• Compare their worst falls.

If one wins on all three, the NAV was irrelevant. If the result is mixed, you have a real decision to make, and it is not about the unit price. The related question, why your own SIP return can look different from the fund's return, is covered in why SIP returns differ from fund returns.

Official sources. NAV is calculated and published under SEBI's rules; AMFI publishes each scheme's NAV daily. See AMFI for the daily NAV, and SEBI's investor site for how mutual funds are regulated.

This article is for education, not investment advice. Assumed figures are illustrations, rules change, and you should verify details with the fund house before you act.