When you buy an ETF (exchange-traded fund) on NSE or BSE, you pay the market price on your screen. The fund also has a NAV, the value of what it actually holds. Most of the time the two are very close. Sometimes they are not, and buyers who do not notice can pay more than the units are worth. This guide explains the difference, the role of iNAV and market makers, and how to check before you buy.
Two prices for the same unit
- NAV (net asset value): the value of all the ETF's holdings (shares, bonds or gold) plus cash, minus expenses, divided by the number of units. The official NAV is calculated once a day after the market closes.
- Market price: the price at which units change hands on the exchange, set second by second by buyers and sellers.
The gap between them, as a percentage, is the premium or discount:
Premium (or discount) = (market price − NAV) ÷ NAV × 100
Example: a gold ETF's estimated NAV is ₹110.00 and it trades at ₹112.00. The premium is 2 ÷ 110 × 100 = 1.8%. A buyer at ₹112.00 pays 1.8% more than the gold behind the unit is worth. If the premium later disappears while gold is flat, the buyer loses that 1.8%.
iNAV: the live estimate
Because the official NAV is only calculated at the end of the day, fund houses publish an iNAV (indicative NAV) during market hours. It is recalculated every few seconds from the live prices of the ETF's holdings. iNAV is the number to compare with the market price while the market is open. You can usually find it on the fund house website and in the exchange's ETF data.
For a NIFTY 50 ETF, iNAV follows the live NIFTY level. For a gold ETF, it follows the domestic gold price, which can be watched live through the MCX gold rate:
Look at the change for the day. If gold is up 1% but a gold ETF's market price is up 3%, the ETF has probably moved to a premium, perhaps because of a rush of buyers. Comparing the ETF's move with the metal's move is a quick check even before you look up iNAV.
How market makers keep the price near NAV
Two groups keep ETF prices in line:
- Market makers appointed by the fund house place buy and sell orders on the exchange throughout the day, so there is usually someone to trade with near the iNAV.
- Authorised participants and large investors can create new units from the fund (by delivering cash or the underlying holdings) or redeem units back to it, but only in large blocks called creation units.
This creates an arbitrage, a low-risk trade on a price gap. If the ETF trades at a premium, they create new units at NAV and sell them on the exchange at the higher price, which pushes the price down. If it trades at a discount, they buy cheap units on the exchange and redeem them at NAV, which pushes the price up. In large, liquid ETFs this keeps the gap to a fraction of a percent.
Why gaps sometimes open
- Low trading volume. A small ETF with few buyers and sellers can have a wide bid-ask spread, and the last traded price may be stale.
- Demand surges. When many investors rush into one theme, for example gold or silver in a sharp rally, buying can run ahead of new unit creation and ETFs trade at a premium for days.
- Market timing differences. ETFs on foreign indices (such as US stocks) trade in Indian hours while their underlying market is closed, so iNAV is partly an estimate. Limits on overseas investment for Indian fund houses have also, at times, stopped new units being created, letting premiums build up.
- Opening and closing minutes. Spreads can be wider just after 09:15 and near 15:30, before market makers settle in.
Selling has the same problem in reverse: a holder who sells into a discount receives less than the holdings are worth, so the iNAV check applies on the way out as much as on the way in. The gap matters most for people who trade in and out often. It matters little for a long-term holder of a large, liquid ETF, as long as they did not buy at a big premium.
A worked example: buying with care
Suppose you want to invest ₹1,00,000 in a NIFTY 50 ETF. iNAV is ₹250.40. The order book shows the best buy (bid) at ₹250.30 and best sell (ask) at ₹250.50.
- A limit order at ₹250.50 buys 399 units for about ₹99,950. You pay 0.04% above iNAV.
- A market order in a thin ETF might fill some units at ₹250.50, some at ₹252 and some at ₹255 if sellers are few. The average could be 1% or more above iNAV, about ₹1,000 lost on day one.
The fix is simple: check iNAV, look at the bid and ask prices, and use a limit order close to iNAV. The bid-ask spread guide explains the order book in more detail.
Checking an ETF before you buy
- Daily traded value. Higher means tighter spreads and prices closer to iNAV. The ETFs page lists NSE ETFs with prices and recent moves.
- Bid-ask spread. A spread of a few paise on a ₹250 unit is healthy; several rupees is a warning.
- Premium or discount history. Fund houses disclose it; repeated large premiums suggest supply problems.
- Tracking error and expense ratio. These affect your long-run return separately from the daily price gap; see the expense ratio guide.
ETFs compared with mutual funds on this point
A mutual fund has no market price; you always buy and sell at the day's NAV. That is one reason some investors prefer an index fund for small monthly investments, accepting a slightly higher expense ratio in return for never paying a premium. The trade-off is that a mutual fund order placed at 11:00 gets that evening's NAV, so you do not know your exact price when you place it, while an ETF order fills at a price you can see on the screen. The ETF vs mutual fund guide covers the full comparison.
Common mistakes
- Using market orders in thin ETFs. This is the most common way to overpay.
- Comparing the price with yesterday's NAV. Use the live iNAV during market hours.
- Chasing a rally in a popular ETF. Premiums often appear exactly when everyone is buying, and fade later.
- Assuming a discount is a bargain. A persistent discount in an illiquid ETF can still be there when you want to sell.