What Is NAV in Mutual Funds? Explained Simply
NAV — Net Asset Value — is the price at which you buy or sell mutual fund units. But a common misconception is that a lower NAV means a "cheaper" fund. Here's what NAV really means and how to use it wisely.
What Is NAV?
NAV is the per-unit market value of a mutual fund scheme. It is calculated at the end of every trading day after the stock market closes (by 11 PM IST). The formula is:
Think of it like a share price for a mutual fund. When you invest ₹10,000 in a fund with NAV ₹100, you get 100 units. When NAV rises to ₹120, your investment is worth ₹12,000 — a 20% return.
AMFI (Association of Mutual Funds in India) publishes official NAVs for all funds by 11 PM each trading day. DhanDaily sources NAV data directly from AMFI.
The NAV Myth: Lower NAV ≠ Cheaper Fund
This is the most common mistake first-time investors make. Many people prefer funds with lower NAV thinking they are "cheaper" — similar to thinking a ₹100 stock is cheaper than a ₹5,000 stock.
Why it's wrong: NAV only reflects the fund's history, not its value. A fund that started at ₹10 and grew to ₹500 (NAV ₹500) has delivered far better returns than a new fund at ₹10. A higher NAV just means the fund has been growing longer.
What matters is the percentage return going forward — both funds will give you the same return if they invest identically. Focus on the fund's portfolio quality, consistency of returns, and expense ratio — not the NAV number.
Direct vs Regular Plans: A Critical Difference
Every mutual fund scheme exists in two versions:
- Regular Plan: You invest through a distributor or advisor who earns a commission (typically 0.5%–1% annually). This commission comes out of the fund's assets, making the Regular Plan's NAV grow slightly slower.
- Direct Plan: You invest directly with the fund house (via AMC website, Zerodha Coin, Groww, etc.). No distributor commission = lower expense ratio = higher NAV growth over time.
Real-world impact on ₹10 lakh over 20 years:
The ₹12 lakh difference is purely from the lower expense ratio in the Direct plan. Always choose Direct plans if you can manage your investments independently.
Understanding Expense Ratio
The expense ratio is the annual fee charged by the fund house as a percentage of your invested amount. It covers fund manager salary, administrative costs, and distributor commissions (in Regular plans).
- Equity mutual funds: 0.5%–1.0% (Direct), 1.5%–2.5% (Regular)
- Debt mutual funds: 0.1%–0.5% (Direct), 0.5%–1.5% (Regular)
- Index funds/ETFs: 0.05%–0.25% — lowest cost option
SEBI has capped expense ratios and requires fund houses to charge lower fees for larger AUM (Assets Under Management). Always check the expense ratio before investing — it's the only cost you can control.
How to Read Fund Returns: CAGR Explained
Returns in mutual funds are expressed as CAGR (Compounded Annual Growth Rate) — the steady rate at which your investment would have grown to reach the current value.
If a fund shows 1Y return of 18%, 3Y return of 15%, and 5Y return of 16%:
- The 1Y number is recent performance (can be a fluke, bull market effect)
- The 3Y and 5Y CAGR are more meaningful — they smooth out market cycles
- A fund that shows 16% over 5 years has proven consistency across market ups and downs
Compare a fund's CAGR against its benchmark index (e.g., Nifty 50 for large-cap funds). A fund that can't consistently beat its benchmark over 5+ years is not adding value over a simple index fund.
SIP vs Lump Sum: Which Is Better?
SIP (Systematic Investment Plan) means investing a fixed amount monthly — say ₹5,000 every month. Lump sum means investing everything at once.
SIP advantages: Rupee cost averaging — you buy more units when markets are low, fewer when high. This reduces the impact of market timing. It also builds investment discipline.
Lump sum advantages: If you invest at a market low, lump sum outperforms. But timing the market consistently is impossible for most investors.
Best approach: Use SIP for regular monthly savings. If you receive a large bonus or inheritance, invest 50% as lump sum and spread the rest via SIP over 6–12 months.