Stop ignoring these three mutual fund terms - they could be costing you lakhs
You opened a mutual fund app, found a fund you liked, and then saw a wall of numbers: NAV, AUM, expense ratio, exit load. Most people ignore them and just hit invest. But three of those numbers directly affect how much money you make. Here's what they actually mean.
MUTUAL FUNDS
Stop ignoring these three mutual fund terms - they could be costing you lakhs
Rahul is 29, earns well, and recently decided to start investing in mutual funds. He opened an app, shortlisted a fund with great past returns, and was about to invest — until he saw the fund's NAV was ₹87. His colleague's fund had a NAV of ₹12. Rahul assumed the cheaper one was a better deal, like buying a cheaper stock.
He was wrong. And that one misunderstanding could have led to a poor investment decision.
If you've ever felt confused by mutual fund numbers, you're not alone. Let's decode three terms that every investor must understand - NAV, AUM, and expense ratio - in plain, honest language.
NAV: Net Asset Value
NAV is simply the price of one unit of a mutual fund on a given day.
Think of a mutual fund as a large thali: a shared meal where many people pool money to order a variety of dishes (stocks, bonds, etc.). The NAV is the per-person cost of that thali today, calculated after the kitchen closes each evening.
Mathematically: NAV = (Total value of all assets − liabilities) ÷ Total number of units outstanding.
A fund with NAV of ₹87 is not expensive. A fund with NAV of ₹12 is not cheap. NAV simply tells you the current value of one unit. What matters is how much that NAV grows over time not where it starts.
This is one of the most common misconceptions among first-time mutual fund investors. A higher NAV means the fund has been around longer and has grown more. It says nothing about whether the fund is "costly" to buy.
When you invest ₹10,000 in a fund with NAV ₹87, you get approximately 114.9 units. In a fund with NAV ₹12, you get 833 units. Both investments are worth exactly ₹10,000. What matters is which fund grows more from here.
AUM: Assets Under Management
AUM is the total market value of all the money a mutual fund is currently managing.
If 1 lakh investors each put ₹50,000 into a fund, and the investments have grown, the fund might now be managing ₹6,000 crore. That ₹6,000 crore is its AUM.
A large AUM say ₹20,000 crore or more, generally signals investor trust and fund stability. But for certain categories, size can work against you. A very large small-cap fund, for instance, struggles to buy meaningful quantities of small company stocks without moving the price. This is called impact cost, and it quietly reduces returns.
For large cap and index funds, AUM size matters less. For mid cap and small cap funds, watch out when AUM grows very large, it can limit the fund manager's agility.
As a rule of thumb: don't chase the biggest fund. Choose based on strategy fit, not size.
Expense Ratio: the silent return killer
This is the one most investor overlook and it may be the most important of the three.
The expense ratio is the annual fee a mutual fund charges to manage your money, expressed as a percentage of your investment.
A fund with a 1.5% expense ratio takes ₹1,500 every year for every ₹1 lakh you have invested — regardless of whether the fund made or lost money that year.
SEBI regulates the maximum expense ratio allowed. For equity mutual funds, it ranges from 1.05% to 2.25% depending on the fund's AUM larger funds must charge less.
Here's why it matters over the long term. Say two funds both earn 12% gross returns. Fund A has an expense ratio of 0.5% (direct plan). Fund B has 1.75% (regular plan via distributor). Over 20 years on a ₹10 lakh investment:
Fund A grows to approximately ₹59.6 lakh.
Fund B grows to approximately ₹47.6 lakh.
That 1.25% difference costs you over ₹12 lakh over two decades. The expense ratio is not a small print detail. It is a compounding cost that works against you every single day.
Always compare direct plan vs. regular plan expense ratios before investing. Direct plans cut out the distributor commission, which is why they consistently have lower expense ratios and higher returns over time.
Putting it all together
Next time you look at a mutual fund factsheet, here's what these three numbers should tell you:
NAV tells you the current price of one unit, use it to calculate how many units you're buying, not to judge whether the fund is cheap or expensive.
AUM tells you how much money the fund manages a signal of scale and trust but watch out for bloated AUM in mid and small cap categories.
Expense ratio tells you the annual cost of staying invested lower is almost always better, and direct plans are your best friend here.
These three numbers don't tell you everything about a fund. But misunderstanding even one of them can lead you to make the wrong choice like Rahul almost did.
Common myth busted: A fund with NAV ₹12 is NOT cheaper or better than one with NAV ₹87. Both give you the same ₹10,000 worth of units. What matters is how much that NAV grows from today — not where it starts. Choosing by NAV is like choosing a company by its share face value.
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Disclaimer:This article is published by TeamSanchay for educational and informational purposes only. It does not constitute personalised financial, investment, tax, or legal advice. All return calculations and illustrations mentioned (including the expense ratio comparison) are indicative and based on assumed rates, actual returns may vary significantly. Mutual fund definitions, SEBI-regulated expense ratio limits, and category guidelines are sourced from publicly available information on AMFI India (amfiindia.com) and SEBI (sebi.gov.in). These regulations are subject to change. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing. Readers are advised to consult a SEBI-registered investment adviser before making any investment decisions.
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