The ₹1,000 NAV Myth: Why 'Expensive' Funds Are Often Better

Rohan has ₹20,000 to invest. Upon seeing an Ad about a New Fund Offer (NFO) launching at just ₹10 NAV, he becomes eager to invest in this specific Fund A. Yet, his long-time friend Dileep, who is also an experienced investor, suggested choosing Fund B with ₹1000 NAV.

Fund A would have bought 2000 fund units, while Fund B would have bought only 20 units.

Looking at this math, Rohan immediately chose Fund A, because he felt really good about buying a high volume of units at dirt-cheap prices. Fund B got rejected solely due to its price, which is a common mindset among many middle-class Indians.

But Dileep expressed concern over this choice, stating that NAV does not show anything about the fund’s true value, performance, and expenses. He pulls up numbers to give a simple side-by-side comparison of the two funds and to pinpoint Rohan's underlying misunderstanding.

Let’s revisit the lesson that Dileep gave to Rohan, so that investors like him do not mistakenly limit their choices by just looking at the NAV.

CAGR & XIRR: How Fast Is Your Money Actually Growing?

Based on the type of investment made, either as a one-time lump sum or monthly SIPs, the rate of growth of the investment is calculated using either of these growth rates: the Compound Annual Growth Rate (CAGR) or the Extended Internal Rate of Return (XIRR).

Compared to the lump sum strategy, where the entire investment matures at the same time, a monthly staggered investment strategy requires computation with different maturity times. The extended internal rate of return takes this into account.

Additionally, these numbers can be expressed as Trailing Returns, or point-to-point values of CAGR or XIRR. It means these return rates are calculated for the duration between the day the data was checked and a defined timeframe preceding that day. Since the endpoints of the data are just taken blindly without accounting for market events happening around the endpoints, this metric is heavily affected by biases.

The alternative metric, Rolling Returns, shown as year-to-year values of CAGR or XIRR, overcomes this bias. It calculates the fund return rate for a single 3- or 5-year period and then presents data for the series of these overlapping periods. It shows whether the fund has experienced consistent decent performance in every 3- or 5-year block or has it performed well in only a few years and completely crashed in most other years.

How to interpret the numbers?

To interpret your fund growth, the CAGR or the XIRR values must be compared to two primary baselines: Inflation, the Benchmark Index growth rate, and the Category Average growth rate.

• Returns vs Inflation: The growth rate of a fund must beat inflation, which is usually around 4%, and also the fixed deposit growth rate, which is usually around 4% - 6.5%. Going further, a fund estimated to grow at 5% when inflation is 4% is technically having a net growth, but is barely doing well, and so can be avoided.
• Returns vs Benchmark Index: The fund must do better than the benchmark indexes of the same investment style, size, and type. Common benchmarks can be: Large Cap funds compared to the Nifty 50 Index or the BSE 100 Index. Mid Cap funds compared to the Nifty Midcap 150 Index, or Digital/Tech Sector Fund compared to the Nifty IT Index.
• Returns vs Category Average: The fund needs to outperform its peers, or its category average. This is the mathematical average of CAGR or XIRR generated by all the active mutual funds within a specific category over a set period.

Equity mutual funds in India have historically delivered a long-term CAGR in the 10-12% range, based on Nifty 50/Sensex performance over the past 20+ years, and this return rate can be used as a rough benchmark here.

Where to find it?

Trailing Returns: On the Fund Factsheet, disclosed monthly, and on the performance dashboard of any investment App, as trailing 1-year, 3-year, 5-year, and “Since Inception” CAGR.

Rolling Returns: Not found on standard Factsheets or App dashboards. Can instead be calculated through easy-to-use tools on independent fund research portals (MF Online Rolling Returns Calculator by Advisorkhoj, PrimeInvestor, Value Research).

Why Does This Matter More Than NAV?

The Growth Illusion: A low NAV often tricks investors into thinking a fund has immense room to grow, but that does not give information on whether the fund is capable of returns strong enough to sustain that expected immense growth. That information about compounding strength is given by CAGR and XIRR only.

For example, an NFO at ₹10 with a poor CAGR of 7% will likely diminish the investor’s purchasing power while competing with inflation, whereas an expensive fund with a ₹1,200 NAV and a CAGR of 14% will comfortably multiply the investor’s wealth.

Top 10 Holdings, Market Cap Split & P/E: What Is the Real Value of Your Fund?

The Top 10 Holdings show the ten Indian companies where the largest chunk of the mutual fund is invested. It is the total percentage weight of these top 10 stocks. A mutual fund will typically spread the total investment across 30 to 80 different company stocks. These companies may be market heavyweights like Reliance Industries, HDFC Bank, ICICI Bank, Infosys, or Tata Consultancy Services (TCS).

The top holdings naturally affect the fund's performance to a considerable degree, which can be a stock price surge or a drop. Investing in a diverse set of companies ensures that the mutual fund is less susceptible to this Concentration Risk.

The Market Cap Split shows how the money is divided within the fund among different company sizes: Large Cap segment of giant, stable corporations, Mid Cap segment of medium-sized, fast-growing businesses, and Small Cap segment of young and high-risk businesses, as outlined in SEBI’s Master Circular for Mutual Funds, 2026 (Chapter 3, Para 3.9, Definition of Large Cap, Mid Cap and Small Cap).

This split percentage of an investor’s fund shows whether the fund has chosen a strategy of risky fast growth, safe but dependable slower growth, or a balance of the two.

The Portfolio Price-to-Earnings Ratio (P/E) measures how much an investor pays for every rupee of a company’s earnings or profit. The portfolio P/E ratio is a weighted average of all the stock P/E ratios that make up a mutual fund.

P/E Ratio of a Stock = Current Market Price of 1 Share / Profits per Share (EPS)

Taking an example,

A fast-growing consumer brand (company A) has a stock price of ₹4,000 and actual profit per share of ₹50. Another slow-growing mature public sector bank (Company B) has a stock price of ₹300 and actual profit per share of ₹30.

Their P/E ratios are 80 and 10, respectively. Company A costs 8x more per rupee of profit than Company B. Company A has a higher P/E ratio because investors expect its profits to explode in the near future, and are willing to pay the higher price tag today.

A mutual fund with a higher percentage of company stocks with high P/E ratios is likely built to run a Growth Strategy. The fund manager is willing to pay the premium price today because the earnings from these companies are expected to skyrocket tomorrow and bring those profits to the mutual fund.

On the flip side, a mutual fund made up of stocks from Company B and similar follow a Value Strategy. The fund manager is deliberately buying steady, cash-generating companies that the market is temporarily underpricing.

How to interpret the numbers?

• Top 10 Holdings: A well-diversified fund portfolio will have 30% to 45% of these stocks. A higher percentage increases the overall concentration risk.
• Market Cap Split vs. Benchmark & Category Average: If the Category Average is 85% Large Cap, but your specific fund only has 73% Large Cap and has quietly loaded up on Mid/Small caps, they are "cheating" the category rules to amplify short-term returns.
• Portfolio P/E Ratio vs Benchmark & Category Average: P/E higher than the Benchmark points to a Growth strategy, while P/E lower than the Benchmark indicates a Value strategy.

Where to find it?

Top 10 Holdings, Market Cap Split: On independent mutual fund research platforms like Value Research, Moneycontrol, or Morningstar India, on the monthly Fund Factsheet, and Investment Apps.

Portfolio P/E Ratio: On independent mutual fund research platforms like Value Research, Moneycontrol, or Morningstar India.

Why Does This Matter More Than NAV?

Knowing the NAV value fails to prevent the two traps that can happen.

• The Portfolio Cloning Trap: The new exciting fund offered may be investing in the same top company stocks as your existing mutual funds. So investing in them brings no new value to your mutual fund portfolio. A review of the stocks used in the mutual fund portfolio can mitigate this mistake.
• The Value vs. Price Reality: If the higher NAV fund had a lower Portfolio P/E ratio, then it is mathematically giving the investor way more corporate earnings per rupee than the "cheap" new one.

Expense Ratio: Fees That Undercut Your Gains

Total Expense Ratio (TER) is the annual fee an Asset Management Company (AMC) charges, expressed as a percentage of your investment, deducted regardless of whether the fund gains or loses money.

A higher percentage indicates lower returns for the investor. For example, if a fund's underlying stocks grow by 12% in a year, but the fund has a TER of 1.5%, your actual pocketed return for that year drops to 10.5%.

How to interpret the numbers?

• Expense Ratio (TER) vs. Category Average: Fees vary dramatically by asset type. While a 1% to 1.5% TER is typical for actively managed equity funds, it is considered incredibly expensive for a passive Index fund or a Debt fund.
• The Plan Test (Direct vs. Regular): The Regular Plan includes built-in distributor commissions, making it up to 1% more expensive every single year. Instead, the Direct Plan strips away these hidden fees, ensuring more of your money goes straight into compounding wealth.

Where to find it?

Expense Ratio: On independent mutual fund research platforms like Value Research, Moneycontrol, or Morningstar India, on the monthly Fund Factsheet, and in Investment Apps.

Why Does This Matter More Than NAV?

This fee compounds over the years.

For example, a ₹5 lakh investment held for 15 years with a 1% TER gap can mean a difference of ₹3.3 lakh in your final corpus, assuming a 12% gross annual return.

The NAV would never have warned you about this.

Putting It Together: Fund A vs Fund B

Revisiting Rohan’s example, below is a side-by-side comparison of the two fund choices.

The data clearly show why Fund B, with the higher NAV, remains the better choice. Fund B has better returns, holdings, and lower costs. And most of its numbers hold up well against the category average, and that is a reassuring sign. Additionally, new funds often have missing data that is necessary for making informed choices.

Fund B's Top 10 Holdings concentration (52%) is above the typical 30-45% diversification range, which shows more concentration risk than a maximally diversified portfolio. Weighing against its stronger rolling returns and lower costs, this may be acceptable, as no fund scores perfectly on every metric. This is exactly why checking multiple factors matters.

Why SIPfund?

The SIPfund App works on algorithm-based goal tracking and provides a consolidated tracking view of all your investments, so your progress and future opportunities are always visible to you. And your investments with the fund houses are completely secure, routed through NSE’s mutual fund platform.

As an AMFI-registered mutual fund distributor, we support investors with personalized consultation on goal planning, fund selection, and guidance during market volatility.

Conclusion

Working through the table above shows why the price tag alone tells you so little. At the end of the day, a mutual fund’s NAV is simply a reflection of its current unit price, and not a measure of its true worth or future growth potential. To build long-term wealth, the focus should be on the core data to gain the clarity needed to ensure your money is tied to a high-performing investment engine.

A simple table using the five metrics can be used as a first-level analysis to filter out funds based on the goal of the investor.

Try it yourself. Pick a mutual fund you currently own or are thinking of buying, and fill in these five core metrics to see what you are truly paying for:

Value Research and Advisorkhoj are free fund research platforms; no login required.

Already ran the table above? Next, choose your funds on our App (iOS or Android).

You can also call our experts at 95133 55661, and they will help set everything up.

Disclaimer: The information provided in this article is for educational purposes only and does not constitute investment advice or a recommendation to buy or sell any mutual fund. Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.