I am planning to install VMWare fusion on OSX. However, due to insufficient storage in physical disk. Can I check if I could install Windows 7 into my NAS raid 1 hard disk and open up VMware image from there?
Will there be any sort of performance issue?
While you technically can do that nonetheless it is not necessarily a good practice as a drop in network connectivity has the potential to corrupt a VM beyond repair. That said, make sure you maintain proper* backups, especially if running VM's from a NAS!
*It is a known fact that Time Machine is not 100% reliable backing up/restoring Virtual Machines under all circumstances/conditions. Also backing up Virtual Machines via Time Machine is disk/time intensive and wastes a tremendous amount of space for something that may be corrupt and worthless come time to restore it. At a minimum I would exclude Virtual Machines from Time Machine and with the Virtual Machines shutdown, not suspended, and VMware Fusion closed then manually copy the Virtual Machines Package(s) to an alternate location, preferably on to a different physical hard disk. Then keep the User Data that is stored within the Virtual Machine backed up off of the Virtual Machine on a regular basis so as to always have a current User Data Backup. If you have to restore a properly backed up Virtual Machine that is not as current at least you'll have a working Virtual Machine and current User Data to go forward with when you find out your Time Machine Backup of the Virtual Machine fails.
In that case, should i install VMware images on my external hard disk using USB3 and run from there each time i need to use it?
Would there be any kind of performance issue with this approach?
With the exception of a few primary VM's that I run on the internal drive I run most of my VM's from a combination of external drives, FireWire, USB and Thunderbolt. Obviously the latter yields the best performance. That said, a similar type of risk is there in that if one accidentally disconnects the device while a VM is running however IMO it's more likely to have network connectivity issues vs accidental disconnects although YMMV . I have and do occasionally run a VM from a NAS however it it more the exception then the rule and is only for a short periods of time. All of my equipment is on multiple UPS devices which will prevent a loss of connectivity if the electric goes out however that does prevent all ways loss of connectivity can occur.
My recommendation is to increase your internal storage space (if possible) to run primary VM's internally and then use FireWire, USB or Thunderbolt drives to run additional VM's that will not fit on the internal drive and just use the NAS for storage. If you need to use USB than 3 is certainly better than 2 and not only because of the obvious difference in speed!