How Do ETFs Work? What is iNAV?
ETFs (Exchange-Traded Funds) are investment funds that trade on stock exchanges like stocks. These funds hold a collection of assets, such as stocks, bonds, or commodities, and are designed to track a specific index, sector, or theme. When you invest in an ETF, you’re buying units of this fund, which in turn gives you exposure to the ETF’s underlying assets.
ETFs trade on exchanges, and their prices fluctuate daily based on supply and demand. This means that, just like stocks, the price of an ETF can go up or down during market hours. The cost of an ETF reflects the value of its underlying assets, but market factors like investor sentiment or news can also influence it.
Asset Management Companies (AMCs) create and manage ETFs. They work with market makers who help ensure enough buying and selling activity to keep the ETF liquid (easy to trade). These market makers also help ensure the ETF’s price stays close to its actual value by buying and selling units when necessary.
Some examples are Aditya BSL Nifty 50 ETF, SBI Nifty Next 50 ETF, UTI Gold ETF Fund of Fund etc.
What is iNAV?
iNAV (Indicative Net Asset Value) is a near real-time estimate of an ETF’s value, calculated by tracking the prices of its assets. It gives investors an idea of the actual value of the ETF’s underlying assets, updated frequently throughout the trading day.
iNAV helps investors see if an ETF is trading at a fair price. If an ETF’s market price is higher than the iNAV, it is said to be trading at a premium, while if it is lower, it is trading at a discount. This can provide trading opportunities based on market conditions.
In short, ETFs offer a flexible and cost-efficient way to invest in a broad range of assets, with their price changing based on market supply and demand. iNAV provides real-time value estimates while market makers and AMCs work together to ensure liquidity and fair pricing. Choosing the right ETFs and understanding factors like iNAV, premiums, and tracking errors can be tricky. AMFI-registered mutual fund distributor or financial advisor can help you make smart choices, avoid mistakes, and find the best investments for your goals. Always seek professional advice to get the most from your investments.
