NAV tells you nothing about whether a fund is cheap

A fund at ₹10 is not cheaper than one at ₹500. The unit price is an accounting artefact, and the NFO industry depends on people not knowing that.

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20 Aug 2026 · 4 min read · investing, mutual-funds, nav

Ask most first-time investors to choose between two funds and a surprising number will look at the NAV. A fund at ₹12 feels like it has room to grow. A fund at ₹680 feels expensive, or late.

This intuition is imported from shares, where price at least relates to something — earnings, book value, the market's view of a business. Applied to a mutual fund it is meaningless, and an entire category of product exists to profit from the confusion.

Why the unit price cannot matter

Net Asset Value is the fund's total holdings, minus liabilities, divided by the number of units outstanding. It is a ratio of two numbers that both move together whenever anyone buys or sells.

Invest ₹10,000:

If both hold identical portfolios and both rise 10%:

Identical. The NAV determined how many units you were issued, and nothing else. Returns are percentage changes in a portfolio's value, and the denominator you happen to divide by cancels out completely.

A fund can literally halve its NAV overnight by issuing twice as many units. Nothing about the investment changes. Some funds have done exactly this, for marketing reasons.

What a high NAV actually indicates

If anything, a high NAV is mildly reassuring: it means the fund has existed long enough and performed well enough for a ₹10 starting unit to compound into a large number.

A fund launched in 2005 at ₹10 and now at ₹680 has delivered about 22% a year for two decades. That is a track record. It is not a warning that the fund is "too high".

Conversely, a NAV of ₹10 tells you only that the fund is new — which means no track record, no observable behaviour in a downturn, and no evidence of how the manager actually invests.

Which brings us to NFOs

A New Fund Offer launches at ₹10 and is marketed hard on exactly this misunderstanding. The pitch is proximity to something familiar: get in at the ground floor, before it goes up.

There is no ground floor. A new fund starts with cash and buys securities at the prices prevailing that day — the same prices an existing fund holds them at. You are not buying earlier or cheaper; you are buying the same market through a vehicle with no history.

What you give up:

A track record. An existing fund lets you examine ten years of returns, its behaviour in 2008 and 2020, its drawdowns, its consistency against a benchmark. An NFO offers a document describing intentions.

A visible portfolio. You can see exactly what an established fund holds. An NFO has a mandate.

Deployment certainty. New funds often hold cash for weeks while building positions, which drags on returns if the market rises during that period.

Occasionally an NFO offers genuine access to a strategy or an asset class not otherwise available — a new international mandate, a specific index with no existing tracker. Those are worth considering on their merits. "It is at ₹10" is not a merit.

What to look at instead

Expense ratio. The most reliable predictor of relative performance in the entire field. A 0.2% index fund against a 1.8% active fund is a 1.6-point head start, every year, guaranteed, before the manager does anything. Over twenty years that compounds into a very large number.

Rolling returns, not point-to-point. A fund's "5-year return" depends heavily on which five years. Rolling returns — every possible five-year window — show consistency rather than one lucky stretch.

Behaviour in drawdowns. How far did it fall in March 2020, and in 2008 if it existed? How long did it take to recover? This tells you more about whether you will actually hold it than any return figure.

The benchmark, honestly chosen. A mid-cap fund beating the Nifty 50 has told you nothing; it should be measured against a mid-cap index. Check what it is being compared to.

Fund size against strategy. A ₹40,000 crore small-cap fund cannot trade its positions without moving prices. Large size in a liquid large-cap strategy is fine; in small-caps it is a genuine constraint.

Manager tenure. A ten-year record produced by three different managers is three records, not one.

The same instinct causes people to prefer the "IDCW" or dividend option because it pays something out.

It does not create anything. A payout reduces the NAV by exactly the amount paid. You have moved money from one pocket to another, triggered a taxable event at your slab rate, and removed capital from the compounding engine.

The growth option retains everything, and you realise gains when you choose to — at capital gains rates, with the ₹1.25 lakh annual exemption available. Unless you specifically need income now, growth is better for almost everyone, and the difference over a long holding is substantial.

Neither the NAV nor the payout is a feature. Both are accounting.

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Where these figures come from

Rates and limits change. Where a figure here differs from the authority, the authority is right — tell us and the page gets fixed the same day.

Published by FinClamp. This guide is information, not financial advice — see the disclaimer.