If you track your mutual fund portfolio and notice the Net asset value (NAV) is falling, your first reaction might be concern, but it is important to remember: a falling NAV doesn’t always mean your investment is performing poorly. A falling NAV is often mistaken as a sign of a bad investment, but that is not how mutual funds should be evaluated.
What matters is whether the fund has consistently delivered superior risk-adjusted returns and generated alpha over its benchmark over a longer period.
In fact, for investors investing through SIPs, a lower NAV can work to their advantage because the same investment amount buys more units, strengthening long-term wealth creation when markets recover.
In many situations, a drop in NAV may simply be the result of dividend payouts, expense deductions, market corrections, or temporary volatility across sector-specific cycles rather than a sign of weak fund management.
What is NAV in mutual funds?
NAV is simply the per-unit value of a fund’s portfolio on a given day, and like stock prices, it moves with market conditions. When markets decline, the NAV may fall because the underlying investments have temporarily lost value. That alone does not indicate poor fund management or permanent erosion of wealth.
A falling NAV is only a data point. The quality of the fund, the discipline of the fund manager, and long-term performance are far better indicators of whether an investment is truly good or bad.
What are the most common reasons behind a decline in a mutual fund’s NAV?
A decline in a mutual fund’s NAV is usually a reflection of what is happening to the assets it owns rather than a problem with the NAV itself. If the prices of the underlying stocks or bonds fall due to market volatility, the fund’s NAV will naturally decline.
At times, the NAV may also fall after an IDCW payout, but this is merely an accounting adjustment and not an investment loss. The only situation that deserves investors’ serious attention is when a fund consistently underperforms its benchmark because of weak stock or sector selection by the fund manager.
Short-term underperformance is part of active investing, but if it persists over a meaningful period, investors should review whether the fund manager is still adding value.
Suppose two investors invest Rs 1 lakh each—one before a 15% NAV fall and another after the fall. How could their long-term outcomes differ?
The advantage of investing after a market correction comes from accumulating more units at a lower NAV, but that advantage gradually diminishes as the investment horizon becomes longer.
Consider two investors investing Rs 1 lakh each.
Investor A invests when the NAV is Rs 100, while Investor B invests one year later, after the NAV has fallen 15% to Rs 85. If the NAV recovers to Rs 150 over the next five years, Investor B earns a return of 15.25%, compared with 8.44% for Investor A, a difference of 6.81%. As time passes, however, the gap narrows.
When the NAV reaches Rs 400 after 10 years, the return difference reduces to 3.91%. At a NAV of Rs 700 after 15 years, it further declines to 2.40 percentage points. By the time the NAV reaches Rs 1,200 after 20 years, the gap falls to 1.72%, and over a 30-year period, it narrows to almost 1%.
This shows that buying after a correction provides an advantage because the same investment buys more units. However, the longer the investment horizon, the smaller the impact of the entry price as compounding takes over. Therefore, time in the market remains far more powerful than trying to time the market.
Can a fund with a falling NAV still outperform its benchmark over a full market cycle?
A falling NAV does not prevent a fund from outperforming its benchmark over a full market cycle. During market corrections, what matters is not whether the NAV has fallen, but how much it has fallen relative to the benchmark.
“For example, if the Nifty 50 declines by 20% during a market correction while a fund falls by only 14%, the fund has actually delivered superior relative performance despite the decline in its NAV. By protecting more capital during the downturn, the fund starts the recovery from a higher base and therefore requires a much smaller gain to reach new highs,” said Manish Srivastava, Executive Director, Anand Rathi Wealth.
This is why investors should evaluate a fund across an entire market cycle by looking at rolling returns, risk-adjusted returns, downside protection, and consistency of performance rather than reacting to a temporary fall in NAV.
How can investors avoid the trap of equating NAV with stock prices?
One of the biggest mistakes investors make is assuming that a mutual fund with a lower NAV is cheaper or offers better value, much like a low-priced stock.
The comparison is misleading because a mutual fund’s NAV is simply the per unit value of its portfolio and not a measure of its attractiveness or future return potential.
For example, a fund with a NAV of Rs 15 is not inherently better than one with a NAV of Rs 1,500. In fact, a fund whose NAV has grown from Rs 10 to Rs 1,500 over the years has shown a strong track record of wealth creation, while a new fund with a lower NAV may have no such history.
Investors should remember that returns are driven by percentage growth, not the absolute value of the NAV.
A 20% increase creates the same return whether the NAV rises from Rs 10 to Rs 12 or from Rs 1,000 to Rs 1,200.
“Instead of focusing on whether a fund’s NAV appears low or high, the evaluation should centre on long-term CAGR, rolling returns, consistency against the benchmark, the fund manager’s ability to generate alpha, portfolio quality, and risk-adjusted returns,” commented Manish Srivastava.
These are the factors that determine long-term wealth creation and not the NAV.
Under what circumstances should an investor actually be concerned about a declining NAV?
A falling NAV becomes a concern only when it reflects a deterioration in the quality of the investment rather than normal market volatility.
“Investors should pay attention if the fund consistently underperforms its benchmark and peers over a longer period, if there are unexplained changes in the portfolio or investment strategy, style, or if a change in the fund manager is followed by sustained weak performance. They should also review their investments if the financial goal is approaching and there is limited time for the portfolio to recover,” recommended Manish Srivastava.
The right approach is not to react to the falling NAV itself, but to understand the reason behind it and evaluate whether the fund continues to justify its place in the portfolio.
How does rupee-cost averaging work when NAVs are declining?
Rupee cost averaging is one of the biggest advantages of investing through SIPs during market volatility. When the NAV falls, the same investment amount buys more units than before, which gradually lowers the average cost of investment.
For example, if an investor contributes Rs 5,000 every month, a fall in the NAV from Rs 50 to Rs 25 doubles the number of units purchased with the same amount. As markets recover, these additional units accelerate wealth creation and turn profitable even before the NAV reaches its previous peak.
“Instead of fearing falling NAVs, disciplined investors should view them as an opportunity to accumulate more units at lower prices, because long-term wealth is created not by timing the market but by remaining invested through market cycles,” stated Manish Srivastava.
What checklist should investors use before deciding whether to hold, buy more, or exit a fund after a NAV decline?
A fall in NAV should trigger a review, not an emotional reaction. The first step is to understand whether the decline is specific to the fund, the entire category, or the market is down. If the broader market or the entire category has corrected, it is usually part of the normal market cycle.
Additionally, compare the fund’s performance with its benchmark and peers across multiple periods. Investors should also check whether the fund manager or AMC has maintained an investment style that might not be working in the current market. Investors should also evaluate their own investment goals and horizon.
“For investors with goals 5 to 10 years away, temporary NAV declines should not influence investment decisions. Historic data shows that even if an investor saw negative returns after investing through a SIP in the Nifty 50 Index for 1 year, simply remaining invested for the next 5 years would have turned those losses into positive returns in the range of 17 to 21%,” according to Manish Srivastava.
Rather than reacting to short-term NAV declines, investors should stay disciplined, continue their SIPs, and maintain an ideal allocation across large, mid, and small cap.
Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing.
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