ETFs
ETFs trade at abnormal prices due to high volatility: check this before investing in mutual fund ETFs to avoid avoidable losses.
The result of the Lok Sabha elections on June 4 surprised many. Sstock market was also hit by panic buying and selling, leading to increased volatility. Although stock prices can be easily calculated in real time, it becomes difficult to do so when it comes to ETF Trading on the stock exchanges. Many investors are unaware of the impact of high volatility on their investment, ended up losing money or making an unexpected gain. According to ET’s report, on June 4, 2024, the Indian stock market saw very strong momentum with the Nifty 50 index falling as much as 8.5% on an intraday basis. On June 5, 2024, the Nifty 50 index increased by 3.36%. These fluctuations in the value of indices like the Nifty 50 and others derailed the prices of most ETFs and hence were trading at either a huge premium or a discount to their indicative value. NIV (iNAV).
What went wrong on June 4-5, 2024 with ETFs?
According to a passive investment manager of a mutual fund homemade, indian sotck exchange was not ready for such volatility and so the NAV of the ETFs varied significantly from their iNAV price.
Zerodha said on X (formerly Twitter) on June 5, 2024: “Many ETFs appear to be trading at a significant premium or discount to their benchmark. Please keep these things in mind before buying and selling ETFs. Whenever there are sudden movements in the markets. , ETFs can trade at abnormal premiums or discounts.
Here is the reason:
Market makers of ETFs had insufficient capital: “Markets did not have sufficient capital to withstand such large and unusual volatility. AMCs use market makers to provide liquidity to buyers and sellers. Suppose you place a buy order for 1 crore of dollars. ETFs units and therefore place an order. But an AMC is run by Trusts, which cannot generate shares on their own, so that’s where a market maker comes in. The market makers will pay the AMC Rs 1 crore, then the AMC will generate the ETF units of equivalent value and then the buyer will receive delivery after T+2 days,” said the head of passive investments of a mutual fund company.
Supply and demand: “Like any security, ETFs trade based on supply and demand in the market. If there are more buyers than sellers (high demand), the price can exceed the iNAV (premium) Conversely, if there are more sellers than buyers (oversupply), the price may fall below the iNAV (discount),” says Amit Goel, co-founder and chief global strategist. of Pace 360, an investment company.
Market anticipation: “If investors anticipate that the price of the ETF’s underlying assets will rise soon, they might be willing to pay a premium over iNAV to access it sooner. On the other hand, if a decline is expected, they could sell their holdings, driving the price down to a discount,” says Goel.
“There are three popular market makers in India: Parwati Capital, East India Securities and Kanjalochana Finserve. All AMCs primarily use these three brokers for market making purposes for their ETFs. Nearly 80% of an ETF’s market making activities are carried out by East India Securities and 20% by others. I don’t have the exact figure but basically East India Securities can deploy 500 crores per day to provide liquidity to all ETFs on days like Budget, Election Results, RBI MPC etc. enter panic mode and investors get nervous. Rs 500 crore is not that big of a sum of money in such volatile days, so that’s what happened yesterday, whatever capital these market makers had, that’s why the value liquidation of ETF units has been exhausted. On regular trading days, this problem is non-existent,” says the head of passive investments at a mutual fund company.
What is the solution to this problem?
According to the mutual fund company’s head of passive investments, the solution to this problem could be to encourage more active participation of stock brokers as market makers. “SEBI should also allow AMCs to do market making themselves. So mutual funds have assets under management. SEBI should allow mutual funds to create shares in ETFs,” said the person cited above.
To invest in an index like Nifty 50, Bank Nifty, Nifty Midcap 150, etc., you either need to buy a exchange traded fund (ETF) that tracks the respective index or invests in a index mutual fund which follows such an index. The value of all shares and cash held by an ETF when the number of outstanding shares of an ETF is divided is called that fund’s net asset value. A mutual fund is typically bought or sold at its closing price for the day, while an ETF is bought or sold on exchanges close to its real-time net asset value.
How does NAV work for mutual funds and ETFs?
As per a SEBI circular dated May 23, 2022, mutual fund companies must publish an indicative net asset value (i-NAV) for ETFs on their website. i-NAV is the real-time value of an ETF share displayed during trading hours. However, the price you see on the stock market is the market price of said ETF. The market price of an ETF depends on various factors such as volatility, demand, timeliness, etc. In the event of high volatility in the market, the price of the ETF may fluctuate very quickly depending on changes in the prices of the underlying shares.
According to Kshitiz Jain, CFA FRM, co-founder of CAGRfunds, a wealth management company, “For equity For ETFs, i-NAV would be reported within a maximum of 15 seconds of the underlying market. For debt ETFs, i-NAV would be reported at least four times per day with a minimum time lag of 90 minutes between the two disclosures.
How much has the indicative net asset value of ETFs varied from their real-time price?
The Securities and Exchange Board of India (SEBI) has mandated each mutual fund house to publish the indicative net asset value (iNAV) of its ETF program on its website. An ETF’s iNAV can help investors assess the value of the ETF before buying or selling it. For example, the iNAV of JUNIORBEES as of June 5, 2024 at 8 p.m. is Rs 710.5366, according to Japanese mutual fund website. However, the closing price of NIFTYBEES on June 5, 2024 on the National Stock Exchange (NSE) was Rs 713 at 3:30 p.m.
According to data shared by Zerodha on So, if you wanted to buy JUNIORBEES, you had to pay Rs 5.23 (approximately) more per unit of the ETF.
Image showing the real-time net asset value of certain ETFs. Source: Zerodha on X.
How to check the i-NAV of ETFs?
Each mutual fund company publishes the i-NAV value of its ETF in real time on its website. For example: Nippon Mutual Fund’s i-NAV can be viewed here: https://mf.nipponindiaim.com/FundsAndPerformance/Pages/INAV.aspx
Motilal Oswal: https://www.motilaloswalmf.com/etf
Some stock brokers like Zerodha also display i-NAV price on its app. “To add iNAVs to your Kite market watch search for ETF Name NAV,” Zerodha said on X.
Motilal Oswal Mutual Fund
Source: Motilal Oswal website as of June 5, 2024 at 9:22 p.m.
What to do if you want to invest in ETFs?
There are two groups of investors: short-term traders and long-term investors. Experts advise what these two investors should do in such situations.
Long-term investors: According to Jain, before buying or selling an ETF, you should compare the i-NAV with the market NAV of the ETF. When buying the ETF, check if the market price is below or close to the I-NAV price and when selling, check if the price is above or close to the i-NAV price. For retail investors, it would be advisable to invest via the index mutual fund route rather than the ETF. “Buying and selling in an index fund would be done based on the end-of-day net asset value of the fund, so the investor does not have to worry about intraday price movement or mismatch between i-NAV and the market price,” he says.
Stock market traders: “When authorized participants create or redeem large blocks of ETFs, temporary imbalances between supply and demand may arise, causing short-term premiums or drawdowns. Price gaps between iNAV and the price of market net asset value can present arbitrage opportunities for sophisticated traders,” says Goel.