A mutual fund‘s NAV is one of the first numbers investors notice when evaluating a scheme.
For some, a lower NAV signals a buying opportunity. Others prefer funds with higher NAVs, believing they reflect stronger performance. Many investors use the metric to compare schemes before making an investment decision.
The answer isn’t as straightforward as it may seem. While NAV is central to how mutual funds are priced and transacted, experts say investors often misunderstand what the number actually represents and what it can and cannot tell them about a fund.
Does a high or low NAV matter?
According to experts, the short answer is no.
A mutual fund’s Net Asset Value (NAV) is simply the per-unit value of its underlying assets after accounting for liabilities and expenses. It is calculated by dividing the fund’s net assets by the total number of units outstanding.
“A mutual fund’s NAV should not be the primary factor influencing an investment decision,” said Aditya Agarwal, co-founder of Wealthy.in.
Unlike a stock price, a high or low NAV does not indicate whether a fund is expensive or cheap, he said. Instead, it reflects the value of the fund’s underlying portfolio on a per-unit basis.
Agarwal explained that a higher NAV often reflects a longer track record and appreciation in the fund’s portfolio over time, while a lower NAV may simply indicate that the scheme is relatively new.
Debasish Mohanty, chief strategy officer at The Wealth Company Mutual Fund, said a fund’s NAV largely reflects when it started and how its value has evolved over time.
“A high NAV does not mean a fund is expensive, and a low NAV does not mean it is cheap,” he said.
Why comparing NAVs can be misleading
Many investors instinctively compare mutual funds based on their NAVs. However, experts caution that such comparisons can lead to incorrect conclusions. Unlike stocks, mutual funds can issue any number of units. As a result, the NAV is merely a representation of the fund’s assets divided by the number of units outstanding.
Consider two investors who each invest ₹10,000. One invests in a fund with an NAV of ₹50 and receives 200 units. The other invests in a fund with an NAV of ₹500 and receives 20 units. If both funds generate identical returns, both investments will grow at the same rate despite the difference in the number of units held.
“Investors should avoid comparing mutual funds solely based on their NAV,” Agarwal said. “A fund with a lower NAV is not necessarily cheaper, nor is a fund with a higher NAV more expensive.”
Mohanty echoed this view, noting that comparing NAVs across funds is not particularly useful because schemes may have different launch dates, portfolio compositions and numbers of units outstanding.
Instead, investors should focus on metrics that provide deeper insights into a fund’s quality and suitability.
What should investors look at instead?
Rather than focusing on NAV, experts recommend evaluating a mutual fund on factors such as:
- Consistency of performance across market cycles
- Risk-adjusted returns
- Portfolio quality
- Fund manager’s track record
- Investment philosophy and process
- Expense ratio
- Performance relative to benchmark and peers
- Alignment with the investor’s financial goals and risk appetite
According to Agarwal, investment decisions should be based on a fund’s ability to generate returns, manage risks and deliver consistent outcomes over time.
“Ultimately, wealth creation is driven by the percentage growth in NAV, not by the NAV level at which an investor enters the scheme,” he said.
Does NAV indicate performance?
While the absolute level of NAV may not be meaningful, changes in NAV over time do provide insights into how a fund’s portfolio has performed.
A rising NAV generally indicates that the value of the underlying investments has increased, while a falling NAV suggests the opposite. However, experts caution against drawing conclusions from the NAV level alone.
“A mutual fund’s NAV, by itself, is not a reliable indicator of its current performance or future return potential,” Agarwal said.
Investors should instead focus on how much the NAV has grown over different time periods and whether the fund has delivered returns commensurate with the risks it has taken.
Mohanty said a comprehensive assessment should include historical returns, consistency of performance, portfolio quality, risk-adjusted returns, expense ratio and how effectively the fund has achieved its stated investment objective.
The bottom line
NAV plays an important operational role in mutual funds. It determines the price at which investors buy and redeem units and reflects the per-unit value of a fund’s assets. But experts say investors should avoid treating it as a measure of attractiveness, valuation or future return potential.
A lower NAV does not make a fund a bargain. A higher NAV does not make it expensive. What ultimately matters is the quality of the portfolio, the investment process, the risks involved and the fund’s ability to create wealth over the long term.
