Why ignoring iNAV can make gold, silver and global ETFs costlier than they look

In an ETF, investors transact at the market price on the exchange, not at the end-of-day NAV

• ETF prices can differ from iNAV due to demand and low liquidity
• Investors risk overpaying if they ignore iNAV before trading
• Check iNAV and market price to avoid buying at a premium

Did our AI summary help?

Exchange traded funds (ETFs) are often considered low-cost and easy-to-understand investments. But recent movements in gold, silver and international ETFs show that investors can sometimes pay much more than what the fund is worth if they ignore indicative net asset value (iNAV).

On February 23, the closing prices of some of the commodity ETFs showed a clear divergence from their iNAVs, highlighting the pricing gap in the secondary market. Nippon India Silver ETF ended at Rs 249.90, about Rs 3.82 lower than its iNAV of Rs 253.72, indicating that the fund traded at a discount despite strong demand during the session.

In contrast, Baroda BNP Paribas Gold ETF closed at Rs 152.25, around Rs 3.07 higher than its iNAV of Rs 149.18, suggesting investors paid a premium over its underlying value. Groww Gold ETF also traded at a noticeable discount, with a close of Rs 15.37 compared with an iNAV of Rs 18.50, a gap of more than Rs 3.

Price divergence 

The noticeable mismatch between the net asset value (NAV), iNAV, and market price for gold, silver, and international ETFs in India is primarily driven by high investor demand, limited liquidity for underlying assets and regulatory constraints.

"Recent episodes in gold, silver and international ETFs show that gaps can widen when bid–ask spreads increase, liquidity thins or the underlying market is moving outside Indian trading hours. While the market-making/creation process normally helps keep prices aligned, it may not adjust instantly in fast markets," Choice AMC deputy CEO Manish Jain said.

ETF prices can be unpredictable and tend to mirror short-term investor sentiment more than the true price changes of gold or silver. A spike in retail purchasing significantly boosts demand for commodity ETFs, which many investors consider a safer alternative to direct stock market investments for gaining exposure.

In an ETF, investors transact at the market price on the exchange, not at the end-of-day NAV. That’s why checking iNAV matters, a frequently updated, intraday estimate of the ETF’s underlying value. It helps investors see whether they are buying at a premium or selling at a discount to fair value.

"iNAV is the almost real-time fair value of one ETF unit, calculated using the latest prices of the assets held by the fund. Ideally, the market price at which the ETF trades should stay close to this value," said Prashant Mishra, Founder and CEO, Agnam Advisors.

In India, many commodity and international ETFs still have low trading volumes and limited market-making support because of this, ETF prices can sometimes trade at large premiums or discounts compared to their iNAV, he said. "If you buy when the ETF is at a high premium, you are effectively overpaying, which reduces your future returns. If you sell at a discount, you may end up losing value unnecessarily," Mishra said.

Key reasons for mismatches

• For silver and niche international ETFs, when demand exceeds supply, the market price can significantly surpass the iNAV.
• Regulatory limits imposed by RBI/SEBI on international funds — such as a $7 billion cap for foreign equities and $1 billion for ETFs — may result in a scarcity of units and consequently raise premiums for international ETFs.
• For international ETFs, there can be a time zone difference. The underlying market such as the US may be closed, leading to the iNAV lagging or not showing real-time updates, even as the ETF continues trading in India.
• In volatile markets, the delay in the arbitrage mechanism can cause authorised participants (APs) to struggle to produce new units swiftly, resulting in a consistent price gap between iNAV and the market price.

The Securities and Exchange Board of India (Sebi) has recently proposed a comprehensive review of the framework related to base price determination and price bands for Exchange Traded Funds (ETFs), citing concerns over volatility alignment and operational gaps in the current system.

Sebi has proposed shifting to a T-1-based benchmark for determining the base price on the trading day (T-day).

The base price may be derived from one of the following:

The closing traded price of the ETF weighted average price of the last 30 minutes, the average indicative NAV (iNAV) of the last 30 minutes, the closing NAV of T-1 if available, or the latest available iNAV of T-1. The regulator has proposed rationalising the existing uniform ±20 percent price band applicable to most ETFs (±5 percent for overnight ETFs investing in TREPs).

What to do

A simple habit can help avoid this. "Always check the iNAV on the asset management company or stock exchange website and compare it with the current market price. If the difference is large, either avoid trading at that time or place a limit order. In many cases, this step can have a bigger impact on your returns than the ETF’s expense ratio," said Mishra.

Jain added that a straightforward discipline minimises surprises by regularly checking iNAV and spreads, particularly during volatile times.