Indicative Net Asset Value (iNAV): What it is and how it works

If you are new to investing in mutual funds, you may have heard terms like Net Asset Value (NAV) and Indicative Net Asset Value (iNAV). While both sound quite similar and are useful for mutual fund investors, they serve different purposes. NAV is calculated for mutual funds and iNAV is calculated for Exchange-Traded Funds (ETFs). Since ETFs are traded on the stock market unlike other types of mutual funds, iNAV helps traders make informed trading decisions.
Let’s understand the Indicative Net Asset Value meaning, how to calculate iNAV, iNAV functions, and the difference between NAV and iNAV.

• Table of contents

1. What is indicative net asset value (iNAV)?
2. How to calculate iNAV?
3. What is the SEBI rule for iNAV disclosure?
4. What is the difference between iNAV and NAV?
5. Key considerations of iNAV

What is indicative net asset value (iNAV)?

iNAV, full form Indicative Net Asset Value, is a real-time estimate of the Net Asset Value (NAV) of an exchange-traded fund (ETF) or other market-traded financial instruments. iNAV allows investors to gauge whether an ETF is trading at a premium or discount relative to its fair value. This enables better decision-making when buying or selling ETFs in the secondary market.

How to calculate iNAV?

Now that you know what is iNAV and the iNAV full form, you need to know how it is calculated. Here’s the iNAV calculation formula:

iNAV=((Σ(Market Price of Underlying Securities*Weight of ETF)+ Cash Equivalent Holdings-Liabilities ))/(Total Outstanding Shares)

iNAV is calculated by summing the real-time market prices of an ETF’s underlying assets, adjusting for cash and liabilities, and dividing by the total number of outstanding shares.

What is the SEBI rule for iNAV disclosure?

The Securities and Exchange Board of India (SEBI) mandates disclosure of Indicative Net Asset Value to prevent price manipulation, improve investor confidence, and facilitate fair trading in the ETF market. According to SEBI regulations:

• Real-time publishing: Fund houses managing ETFs must disclose Indicative Net Asset Value on their websites or through stock exchanges at regular intervals throughout the trading day.
• Frequency of update: It should be updated every 15 seconds to provide investors with accurate and timely information.
• Third-party validation: iNAV calculations should be verified by independent third-party data providers to ensure accuracy and reliability.

What is the difference between iNAV and NAV?

• Frequency: NAV is calculated once daily at the end of trading day. iNAV is updated in real-time during market hours.
• Purpose: NAV is used for mutual funds and determines the purchase or redemption price of mutual fund units. Indicative Net Asset Value is used for ETFs and assists intraday trading decisions.
• Strategy: NAV suits investors with the buy-and-hold investment strategy. iNAV is critical for active traders who need real-time insights for short-term trading decisions.

Key considerations of iNAV

Here are three factors you must consider before using iNAV for making trading decisions:

• Market efficiency: The accuracy of iNAV depends on the liquidity and price efficiency of the ETF’s underlying assets.
• Tracking error: iNAV provides an estimate but is not always an exact reflection of the ETF’s intrinsic value due to tracking errors or stale pricing. The reliability of iNAV also depends on the robustness of data providers and algorithmic calculations.
• Premiums and discounts: Investors should monitor whether an ETF is trading at a significant premium or discount to its Indicative Net Asset Value to avoid overpaying or selling below fair value.

Conclusion

In conclusion, iNAV plays a crucial role in the ETF market by offering real-time valuation and transparency to investors. Understanding how iNAV is calculated and its difference from NAV can help investors make informed trading decisions. While SEBI regulations ensure that iNAV disclosure is timely and accurate, investors should be mindful of potential discrepancies and use it as one of the several tools in their investment strategy.

FAQs:

What is iNAV and how is it calculated?

Indicative Net Asset Value is a real-time estimate of an ETF's value based on market prices of its underlying assets. It is calculated by summing the weighted market prices of holdings, adding cash equivalents, subtracting liabilities, and dividing by outstanding shares.

Why is iNAV important for investors in Exchange-Traded Funds (ETFs)?

Indicative Net Asset Value provides real-time valuation of ETFs to investors and helps them identify price discrepancies, make informed trading decisions, and avoid overpaying or selling at undervalued prices during market hours.

How does Indicative Net Asset Value differ from the Net Asset Value (NAV) of a mutual fund?

iNAV is updated throughout the day for Exchange-Traded Funds (ETFs) and reflects real-time market movements, whereas NAV is calculated once every day for mutual funds after the market closes for the day.

What factors can influence the fluctuation of iNAV throughout the trading day?

The factors that can cause Indicative Net Asset Value (iNAV) fluctuations include changes in underlying asset prices, market liquidity, foreign exchange rates, interest rates, supply-demand imbalances, and geopolitical or economic events.

How can investors use iNAV to make informed trading decisions?

Investors can use iNAV to assess whether an ETF is trading at a premium or discount, make timely buy/sell decisions, reduce price inefficiencies, and enhance portfolio strategies based on real-time market valuations.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.