On further investigation, we noticed that the file associated in Multimedia component is ASCII encoded. So there must not be explicit conversion to UTF-8 while reading its contents, and it should go with default encoding(i.e, ASCII in above case).
Component xmlMultimediaComponent = XMLMMSRepositoryObject as Component;
byte[] binary = xmlMultimediaComponent.BinaryContent.GetByteArray();
string navContent = (binary != null) ? Encoding.GetEncoding("ASCII") : string.Empty;