Database file paths for Named Instances in AAG's
I have configured a 2 node AAG setup with named instances say N1 and N2. 


I wouldn't use named instances, default instances will cause less issues in the long run. We'll get to one of those issues...


  During the AAG creation and database seeding from N1 , I got an error saying that N2 did not have any folders/path similar to N1 and I could not continue.


Correct. Since you're using named instances, the installation directory names will be different which is why you're receiving the error. In order for the databases to seed they must have identical folder structures.


  So I created another Directory path for the database files with the same name as that on Node 1. Will this work?


If the folders are identical, then yes. You'll also need to put the proper security on the new folders.