What Is NAV in a Mutual Fund? Why a Low NAV Is Not Cheap

NAV, or net asset value, is the value of one unit of a mutual fund. It equals the fund's net assets divided by the units outstanding, and it is struck at the end of each business day. A low NAV does not make a fund cheaper.

Most new investors see a NAV of ₹10 next to one of ₹100 and assume the lower figure is the better buy. The arithmetic below shows why that assumption fails. If you are new to funds, what a mutual fund is is a useful starting point.

NAV calculation, step by step

The formula is: NAV = (market value of investments + cash and receivables − liabilities and expenses due) ÷ units outstanding. The fund adds up what it owns, subtracts what it owes, and divides by the number of units investors hold.

Illustrative figures for a hypothetical fund at the end of one business day. Net assets of ₹525 crore divided by 21 crore units gives a NAV of ₹25.00.

NAV timing each business day

NAV is calculated once per business day, after markets close, using the closing values of the fund's holdings. It is not a live price. For a purchase, you get the NAV of the day your money reaches the fund, provided it arrives before the cut-off time; after the cut-off, the next business day's NAV applies. Cut-off times are set by SEBI rules and differ by fund type, so check the scheme's documents before you invest.

Low NAV is not a discount

A fund's NAV level does not decide what you earn. Your money grows in line with the percentage change in NAV, so what matters is how the holdings perform. Suppose ₹1,00,000 is invested once in each of two hypothetical funds that hold the same portfolio, and both are assumed to earn 12% a year for 5 years. Fund A starts at a NAV of ₹10 and Fund B at ₹100.

Both funds end at ₹1,76,234, or about ₹1.76 lakh. Fund A holds ten times as many units, each worth a tenth as much, so the outcome is identical.

The same logic applies to new funds. New fund offers are usually priced at ₹10 a unit by convention, but that is a starting point, not a bargain. A ₹10 fund and a ₹100 fund are each worth what their holdings make of them, so the NAV figure says nothing about which will grow faster.

NAV compared with a share price

A share price is set by buyers and sellers on an exchange and moves through the trading day. A mutual fund unit has no market price. You buy and sell at the NAV, with no bargaining and no separate market price to negotiate.

The NAV also tells you how many units an amount buys. Suppose ₹5,000 is invested at a NAV of ₹25.00. That buys 200 units (₹5,000 ÷ ₹25.00), ignoring stamp duty. A higher NAV buys fewer units for the same money, but each unit already holds more value, so the unit count alone does not show the outcome.

Factors that matter more than NAV level

Three things shape how a fund works for you, and none of them is the NAV level.

Returns are easiest to read as a rate. For regular investments, a money-weighted measure such as XIRR is more honest than a single change in NAV. Costs need checking too, because a fund that charges more has to earn more before you gain; the expense ratio shows that charge. The trade-off is that a fund with a low NAV and high costs can lag one with a high NAV and low costs.

Direct and Regular plans have different NAVs

The Direct and Regular plans of one scheme hold the same portfolio, but the Regular plan carries distribution costs and so has a higher expense ratio. That difference builds up in its NAV, so the two plans show different NAVs on the same day. Comparing those NAVs tells you nothing about which plan is better. Compare their costs instead, as explained in Direct vs Regular plans.

Frequently asked questions

Is a lower NAV a sign that a fund is cheaper?

No. NAV is only the value of one unit, and its starting level is a matter of convention. Two funds with the same portfolio earn the same percentage return whatever their NAVs are, so compare costs and returns instead. A bare NAV figure reveals neither.

Why do new fund offers launch at ₹10 a unit?

New fund offers are usually priced at ₹10 a unit by convention. That figure is a starting point, not a discount. A new fund and an older fund both grow from their own NAV, so the starting figure tells you little about future returns.

Does NAV change during the trading day?

No. NAV is struck once at the end of each business day, not traded live. A purchase gets the NAV of the day your money reaches the fund before the cut-off time, and the next business day's NAV after it. Cut-off times differ by fund type, so check the scheme's documents.