NAV and Expense Ratio, Explained

What NAV actually is

Net Asset Value (NAV) is calculated with a simple formula:

It's published once a day, after markets close, based on the closing value of everything the fund holds. It represents the price of one unit of the fund — nothing more.

Why a low NAV doesn't mean a cheap or better fund

This is the single most common misconception new investors have. Two funds holding the exact same underlying stocks in the exact same proportion, one launched years ago with a NAV of ₹85 and one launched recently with a NAV of ₹12, are not meaningfully different in value for you as an investor.

If you invest ₹10,000 in the ₹85-NAV fund, you get ~117.6 units. If you invest ₹10,000 in the ₹12-NAV fund, you get ~833.3 units. If both funds' underlying holdings then rise by 10%, both investments are now worth ₹11,000 — identical outcome, despite wildly different unit counts and NAV levels.

NAV is not comparable to a stock price in the sense of "cheap" or "expensive." What matters is the fund's percentage growth over time, not its absolute NAV number.

What an expense ratio actually is

Every mutual fund charges an annual fee for managing the fund, called the Total Expense Ratio (TER) — expressed as a percentage of the fund's assets per year (e.g. 1.5%). This covers the fund manager's compensation, research, administrative costs, and distribution.

You never see this as a separate bill. It's deducted daily, in tiny slices, directly from the fund's NAV before it's published — which is why the NAV you see already reflects the cost of running the fund.

Direct vs. Regular plans: the gap that compounds

Every fund is sold in two versions with identical underlying holdings, but different expense ratios:

• Regular plan: bought through a distributor/advisor, who receives a commission built into a higher expense ratio.
• Direct plan: bought directly from the AMC, with no distributor commission — typically 0.5–1% lower expense ratio per year.

A 1% annual difference sounds trivial. It compounds into a lot over long horizons:

(Illustrative compounding at fixed hypothetical rates — actual fund returns fluctuate and are never a straight line. The purpose here is purely to show how a small annual percentage gap compounds, not to predict real returns.)

This is why the same fund can meaningfully differ in outcome purely based on which version of it you hold — the underlying investments never changed, only the cost drag did.