NAV (Net Asset Value) is the per-unit price of a mutual fund scheme, calculated daily after market close. Understanding NAV is fundamental to mutual fund investing, yet it’s one of the most misunderstood concepts — particularly the myth that a fund with lower NAV is “cheaper” or a better deal. Let’s clear all the confusion.
How NAV is Calculated
NAV = (Total Market Value of All Securities Held + Cash – Liabilities) ÷ Total Number of Outstanding Units. For example, if a fund holds securities worth ₹100 crore, has ₹5 crore in cash, ₹1 crore in liabilities, and 10 crore outstanding units, NAV = (100 + 5 – 1) / 10 = ₹10.4 per unit. NAV is updated at the end of each business day.
The Low NAV Myth
Many investors believe a fund with NAV of ₹20 is “cheaper” than one with NAV of ₹500 — this is completely wrong. A mutual fund’s NAV is like a stock’s share price in that lower doesn’t mean cheaper. What matters is the percentage return, not the absolute NAV. A fund growing from ₹500 to ₹600 (20% return) is identical in performance to one growing from ₹20 to ₹24 (20% return). Your investment of ₹10,000 grows to ₹12,000 in both cases.
Why NFOs Aren’t Bargains
New Fund Offers (NFOs) launch at ₹10 NAV, which tricks many investors into thinking they’re getting a “bargain.” This is the low NAV myth in action. A new fund at ₹10 has zero track record, while an existing fund at ₹500 NAV with 15 years of proven performance is far more reliable. Never choose a fund based on NAV level — choose based on performance, consistency, and expense ratio.
When NAV Matters
NAV matters for: determining how many units you receive (investment ÷ NAV = units), calculating your returns (current NAV vs purchase NAV), SIP execution (each installment buys at that day’s NAV), and tax calculations (purchase NAV determines your cost basis). For all these purposes, the absolute NAV level doesn’t indicate whether a fund is good or bad.
What happens to NAV when a dividend is declared?
When a mutual fund declares a dividend (now called IDCW — Income Distribution cum Capital Withdrawal), the NAV drops by exactly the dividend amount. If NAV was ₹50 and a ₹5 dividend is declared, NAV becomes ₹45. This is NOT free money — it’s your own capital being returned. Growth option is almost always better than IDCW for wealth creation and tax efficiency.