Sebi To Consider iNAV Based Price Bands For ETFs: Know How Investors Will Be Impacted

Exchange-traded funds (ETFs) are becoming more and more popular among investors. In 2025, the Indian ETF market reached historic highs, surpassing the Rs 10 lakh crore mark in terms of assets under management (AUM). Amid this rising popularity of ETFs, the Securities and Exchange Board of India (Sebi) is set to introduce a key change in the way investors invest in ETFs. Amid this rising popularity of ETFs, the Securities Exchange Board of India (Sebi) is set to introduce a key change in the way investors invest in ETFs.

The capital markets regulator is now considering allowing the use of the indicative net asset value (iNAV) of the previous trading day (T-1) as the base price for determining price bands for exchange-traded funds (ETFs), according to a report by Hindu Businessline.

What Is Sebi’s Proposed Change

ETFs are traded on the exchanges similar to stocks; thus they are subject to price bands which function similarly to circuit limits to curb extreme volatility and erroneous order entries. At present, ETFs are traded with a fixed ±20 price band. The price band for ETFs is calculated on the basis of the net asset value (NAV) from two trading days ago (T-2). On the other hand, stocks trade with a (T-1) closing price, wherein the closing price of the previous day is used as the basis to determine the circuit limit. The gap between the two systems creates a difference between the price of ETFs and the underlying securities.

For instance, if the stock market witnesses a sharp movement on a Monday, the price bands for Wednesday’s trading session might still be restricted based on Friday’s data. This lag can potentially prevent the price of the ETF from following its underlying index, which in turn can lead to situations where the ETF is stuck at a circuit limit when its actual fair value (iNAV) has moved beyond it.

At present, exchanges download the NAVs for the T-2 day from the Association of Mutual Funds In India (Amfi) website. According to the report, Sebi was initially considering using the T-1 day NAV for ETFs as well. However, since Amfi publishes the ETF prices with a delay, there would be practical difficulties with adopting the T-1 day system.

What is iNAV?

The report mentioned that Sebi is considering the adoption of the iNAV of the T-1 day as the base price for determining ETF price bands. The iNAV acts like a real-time price for the ETF unit. The iNAV of an ETF is updated continuously throughout the trading session (typically every 15 seconds in India). This is unlike the NAV for mutual fund units, which is calculated only once a day after the market closes. The easy availability of the iNAV throughout the trading session during market hours and at the end of the day makes it operationally easier to use.

How the Use of iNAV Can Impact ETF Investors

The adoption of the iNAV-based system for the determination of the price bands for ETFs is expected to impact investors. Here’s a look at some potential changes that are likely to occur if Sebi adopts the iNAV-based system:

Reduced Tracking Error

A tracking error is a measure of how consistently an ETF follows its underlying benchmark index. Through the adoption of the iNAV episode, the ETF's market price is less likely to deviate significantly from its fair value.

Improved Liquidity

Outdated price bands, which may occur due to a lag between the T-1 system used for stocks and the T-2 system used for ETFs, can cause problems for market makers. Updated bands that are more in line with the actual movement of the underlying security can allow the market makers to trade more efficiently and potentially provide investors the chance to buy or sell units without facing extreme premiums or discounts.

Fewer "Trading Halts"

When volatility is high in the market, ETFs can hit artificial circuit filters when the base price is outdated. The adoption of the T-1 data system reduces the frequency of these technical "traps," allowing for smoother trading.

Accurate Corporate Actions

The T-2 system, which is presently in use, requires manual adjustments for corporate actions like the declaration of dividends or stock splits that happen on the T-1 day. Using the latest iNAV automates much of this, reducing the risk of pricing errors that can disadvantage investors.

To conclude, decreasing the gap between the exchange-traded price and the underlying asset value can help in further deepening the ETF market by increasing transparency and curbing extreme volatility.