Indicative NAV

A mutual fund works out its net asset value once every business day. For an ordinary scheme that is enough. You buy and sell at that NAV anyway.

An exchange traded fund is different. Its units trade on a stock exchange all day, like a share. The screen price moves as the shares in the fund's basket move. So a NAV struck once a day is out of date within minutes.

Indicative NAV, or iNAV, closes that gap. It is the ETF's NAV per unit, worked out from the current market value of its portfolio, during the trading hours of the ETF. The stock exchanges where the units are listed disclose it on a continuous basis.

That gives a buyer two numbers at the same moment. One is the traded price on the screen. The other is what the basket behind one unit is worth. The difference between them shows whether the screen price is near fair value or has drifted away from it.

Where the rule comes from. SEBI issued detailed guidance on the development of passive funds by a circular dated 23 May 2022. The workbook lists four pointers from it, and iNAV is the second:

How the number itself is built. It is the ordinary NAV calculation, run during the day instead of once at the end of it. Chapter 5 defines NAV as the net assets divided by the number of outstanding units, where net assets are the marked-to-market value of the portfolio, plus income such as dividend and interest, less the costs and expenses of managing the fund. The workbook's own worked example takes a portfolio marked to market at Rs 72,000, adds Rs 3,000 of dividend income, deducts Rs 600 of expenses, and divides the resulting Rs 74,400 by 6,000 units to give Rs 12.40 per unit. An iNAV does exactly that arithmetic on live prices.

Why an ETF needs one and an index fund does not. An index fund is bought and sold at the NAV determined under the cut-off timings for that fund. An ETF trades on the exchange, so its prices are available on a real-time basis depending on trading volume, and an investor can place limit orders to buy or sell at prices below or above the prevailing price. A continuously disclosed iNAV is what makes such an order an informed one.

What this paper does not give. It does not say how often the iNAV must be refreshed, who computes it, or what gap between the iNAV and the traded price is acceptable. Continuous disclosure by the exchanges is the whole of the obligation as stated here.

Illustrative figures.

Sahyadri Nifty Next 50 ETF has 2 crore units outstanding. At 11.00 a.m. on a trading day its position is:

iNAV at 11.00 a.m. = Rs 497.60 crore ÷ 2 crore units = Rs 248.80 per unit

The exchange shows that continuously. At the same moment the screen shows the ETF last traded at Rs 250.10.

Premium over iNAV = Rs 250.10 − Rs 248.80 = Rs 1.30 per unit, about 0.52%

Priya wants 4,000 units. At the screen price she pays 4,000 x Rs 250.10 = Rs 10,00,400. Valued at the iNAV the same units are worth 4,000 x Rs 248.80 = Rs 9,95,200. The premium is costing her Rs 5,200 — and she can see that, because both numbers are on the same screen. She places a limit order at Rs 249.00 instead of buying at market.

Now scale it. Sahyadri Insurance wants Rs 60 crore of the same ETF. Rs 60 crore is above the Rs 25 crore threshold, so it need not hunt for that much liquidity on the exchange at all — it may transact directly with the AMC. Had it bought on screen at a 0.52% premium, it would have paid roughly Rs 31 lakh more than the underlying basket was worth.

At the close, the fund still strikes one official NAV for the day, exactly as every mutual fund does. The iNAV was never that number. It was the running figure that let Priya and the insurer decide at 11.00 a.m.

Chapter 5 (Mutual Funds), section 5.5.2 (Passive Investing), in the list of pointers from SEBI's guidance on the development of passive funds. The ETF material it rests on is in the same chapter's scheme-category section, and the NAV definition it re-uses is earlier still in Chapter 5.

Questions here are definitional and numeric. Expect the definition itself — the per unit NAV based on the current market value of the portfolio during trading hours — plus the two facts attached to it: that it is disclosed continuously on the stock exchanges, and that a fund of funds values an ETF at the ETF's closing price, not at its NAV. The Rs 25 crore direct-dealing threshold is the other examined number from the same list. The chapter's own sample question on ETFs asks whom an investor transacts with and where the units are credited: a broker, and the demat account.

• iNAV is not the end-of-day NAV. The official NAV is struck once a business day; the iNAV runs through trading hours. Both are NAVs per unit, and only one of them is what the scheme reports.
• iNAV is not the traded price. The traded price is what buyers and sellers agree on the exchange; the iNAV is what the basket is worth. The point of publishing it is that the two can differ.
• A fund of funds values an ETF holding at the ETF's closing price on the exchange — not at its NAV, and not at its last iNAV. This is the detail most often missed in the list.
• Rs 25 crore is the threshold for dealing directly with the AMC. It is not a minimum for anything to do with iNAV. Two facts from the same list; keep them apart.
• The continuous disclosure is made by the stock exchanges on which the units are listed and traded. The daily NAV is the fund's own disclosure; the iNAV is the exchange's.
• This paper gives no refresh interval. If an option offers a number of seconds or minutes, this workbook does not support it.
• An index fund has no iNAV. Its units are bought and sold at the NAV applicable under the cut-off time rules, so there is no intraday price for an iNAV to be compared against.
• A premium or discount to iNAV is not tracking error. Tracking error is the gap between the fund's returns and the index; a premium is the gap between the traded price and the portfolio's value at that moment.