Until recently, I was unaware that some people care about the NAVs (Net Asset Value) of mutual funds. I have never looked at the NAV of a fund though I have been investing in mutual funds for 12+ years. Why? Because NAV is a mere accounting number which you can simply ignore.

  • NAV does not convey any information about the past or future performance of the fund
  • A higher NAV does NOT mean lower future returns, or vice versa
  • Your absolute returns are determined only by the total value of your holdings (NAV x number of units). The number of units of a fund by itself does not have any bearing on the returns.
  • To compare the performance of funds, one needs to look at percentage changes (rolling or point returns) in NAVs and not their absolute values.

To understand why NAVs do not matter, we need to first understand what an NAV represents.

What is NAV?

A mutual fund aggregates investments from multiple investors, each of whom owns a portion of the fund in proportion to the money invested. For bookkeeping, the fund ownership is divided into equal units; NAV represents the value of each unit.

For simplicity reasons, all New Fund Offerings (NFOs) start with an NAV of ₹10. As the fund’s assets grow through profitable investments, the NAV increases. Further investments from new or existing investors do not increase the NAV. Instead, the fund creates more units at the ongoing NAV, representing the increased asset base.

Why NAV Does Not Matter

The absolute NAV is irrelevant because your returns are determined based on the growth of the NAV in percentage terms, not its starting value.

Consider two funds: Fund A with a NAV of ₹30 and Fund B with a NAV of ₹200, both with a starting AUM of ₹1000 Cr, and identical asset allocations and expense ratios. If both generate 20% returns, their ending NAVs will be quite different—₹36 and ₹240—but the value of your stake, i.e. your investment, will have grown by the same amount in both funds.

NAVs do not reflect funds’ historical or future performance either. For instance, a high NAV does not indicate that a fund has excelled. Older funds have higher NAVs because they have more time for compounding. Similarly, a lower NAV does not mean that the fund is cheap or is more likely to generate higher returns in future.

NAVs may also grow at different rates because of differences in target asset allocation. Equity-focused ones tend to have higher NAVs than debt-focused ones because equity funds compound at a faster rate. Comparing NAVs between such funds is like comparing apples to oranges.

Differences in expense ratios too lead to different NAVs, everything else being equal. For instance, “direct” funds have higher NAVs than their “regular” siblings. Both variants start at the same NAV but over time, the direct fund compounds faster because of its lower expense ratio. This results in a higher NAV of direct funds, a gap which only increases over time. Higher NAVs is NOT a disadvantage of direct funds. Though the purchase price of direct funds is higher, so is their selling price, leading to higher returns than regular funds.

Next time you evaluate mutual funds, ignore the NAVs—paying any attention to them may only lead to poor decisions.