Etymology of 'Manimahesh' signifies a "jewel (Mani) on Lord Shiva's (Mahesh's) crown". According to a local legend, the moon-rays reflected from the jewel can be seen from Manimahesh Lake on clear full moon night (which is a rare occasion). However, it has been inferred that such a phenomenon could be the result of reflection of light from the glacier that embellishes the peak in the form of a serpent around Shiva's neck

A legend in which Lord Shiva himself is tricked is narrated. According to this narration linked to Dhancho where pilgrims spend a night on their way to Manimahesh Lake, Lord Shiva, pleased with the devotion of one of his ardent devotees Bhasmasur (an asura or demon) bestowed a boon, which gave powers to Bhasmasur under which Bhasmasur touching anyone would reduce that person to ashes. Bhasmasur wanted to try this boon on Shiva himself. He, therefore, followed Shiva to touch him and get rid of him. However, Shiva managed to escape and enter into the waterfall at Dhancho and take shelter in a cave behind the rolling waters of the fall. Bhasmasur could not get through the waterfall. Then, Lord Vishnu intervened and killed Bhasamasur. Since then the fall is considered holy