SEBI Announces Applicability of Intra-Day NAV for ETF Transactions by Large Investors Directly with AMCs

The Security and Exchange Board of India (SEBI) announced the exemption of closing day net asset value (NAV) applicability for direct ETF transactions with AMCs. On Friday, the capital markets regulator came out with guidelines regarding the applicability of intra-day NAV for such transactions by large investors and authorised participants.

A circular revealed that the regulating body took this decision based on recommendations of its fund advisory committee and feedback from the mutual fund industry.

What is the Industry Feedback?

The MF industry feedback revealed that closing day NAV might not be relevant for direct ETF transactions by large investors and authorised participants. This is because these funds are traded based on the values of securities comprising the underlying benchmarks.

On the other hand, NAV represents the value of underlying securities based on their most recent closing prices. This value might not apply to an ETF’s holdings when transactions occur overseas across different time zones. That’s because the closing day prices of these securities may be hours’ apart, thereby creating discrepancies between market price and NAV.

An ETF’s market price may also differ depending on its demand and supply in the market. This further adds to its deviance from NAV. In that case, NAV will have little to no significance in ETF transactions.

Considering this feedback, market regulator SEBI declared that intra-day NAV would apply to such transactions on stock exchanges. This intra-day NAV will replace closing day NAV, depending on the executed price of these securities representing such underlying commodities. Accordingly, the markets regulator has issued guidelines on this new form of valuation.

SEBI will clarify this matter in the Common Application Form, Scheme Information Document, and Key Information Memorandum.

Final Takeaway

The regulating body aims to add to the benefits of ETF with this new NAV determination process. However, intra-day NAV may not be fruitful for long-term investors, eying to stay invested for over 10 – 15 years. Here, extensive swings in hourly prices might induce impulse trading, thereby disrupting a long-term investment goal.  Therefore, individuals initially aiming at long-term returns might end up trading more frequently due to rapidly fluctuating ETF values.

On the other hand, a closing day price will prevent these feelings of fear in investors about incurring huge losses due to rapid price fluctuations. This, in turn, will help long-term investors stick through to their original financial plans.

Frequently Asked Questions

1. What are ETFs?

ETFs are collections of financial securities whose units are traded on stock exchanges.

2. How is the NAV of an ETF calculated?

NAV is equal to the value of all securities comprising an ETF minus existing liabilities, divided by the total number of units.

3. What is the use of ETF NAV?

NAV can be useful when predicting an ETF performance against its underlying benchmark’s performance.