The Mystery of Two Prices: Why Your ETF May Be Costing You More Than You Think

If you’ve ever found yourself asking why the price you see on your screen for an Exchange Traded Fund (ETF) doesn’t quite match its reported value, you’re experiencing a fundamental aspect of how these popular investment vehicles operate. This “dual-price” phenomenon, involving both the NAV (Net Asset Value) and Market Price, is often overlooked by investors but carries significant implications for your actual returns.

Think of it this way: The NAV of an ETF is like the appraised value of a house – a professional assessment of its true worth based on its underlying assets. This is a calculated figure, typically updated at the end of each trading day. However, the Market Price is what you actually pay or receive when you buy or sell that ETF on the exchange, driven by real-time supply and demand, much like the final sale price of that house can fluctuate above or below its appraisal based on market interest and urgency. Understanding this crucial distinction between the NAV and Market Price is key to making informed ETF investment decisions.

The Two Faces of an ETF: NAV vs. Market Price

Every single Exchange Traded Fund has two key prices that you need to be aware of:

1. The NAV (Net Asset Value): This is essentially the true underlying value of the ETF.
2. The Market Price: This is the price you actually pay when you buy or sell the ETF on the stock exchange.

Ideally, in a perfect world, these two prices should match perfectly. But as we all know, the financial world isn’t always perfect, and these two prices often don’t align.

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What Exactly is the NAV?

Let’s break down the NAV first. The NAV represents the “per-unit value” of all the stocks, bonds, or other assets that the ETF holds in its portfolio. It’s like adding up the value of every single brick, window, and door in that house we talked about earlier, and then dividing it by the number of ownership “units” (or shares) of the ETF.

Here’s a simple example:

Imagine a Nifty 50 ETF. If this ETF holds a basket of Nifty 50 stocks worth, say, Rs 100 crore in total, and it has issued one crore (10 million) individual units to investors, then its NAV would be calculated as:NAV=Total Number of ETF UnitsTotal Value of Underlying Assets​=1 crore units₹100 crore​=₹100 per unit

It’s important to remember that the NAV is typically calculated after market hours each day. It gives you a precise snapshot of what the ETF’s holdings were worth at the end of the trading day.

But here’s a crucial difference from traditional mutual funds: you don’t buy ETFs directly from the fund house at their NAV. ETFs are designed to trade like individual stocks. This means you buy and sell them on a stock exchange, just like you would buy shares of Infosys or Reliance. And the price you pay on the exchange is the “market price.”

So, What Exactly is the Market Price?

The market price is exactly what it sounds like: it’s the price you see scrolling across your trading screen. It’s the price at which buyers and sellers are willing to transact right now.

Unlike the NAV, which is updated only once a day (after market close), the market price of an ETF changes constantly throughout the trading day. It moves up and down based on a simple principle: demand and supply. If more people want to buy the ETF than sell it, the price goes up. If more people want to sell than buy, the price goes down. Investor sentiment, current news, and even overall market mood can influence this price in real-time.

And this is where the potential for a mismatch begins. The market price can be higher or lower than the NAV, and that difference can significantly impact your actual returns.

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The “Premium-Discount Trap”: When Market Price and NAV Diverge

The gap between an ETF’s market price and its NAV is often referred to as a premium or a discount.

• Trading at a Premium: When the market price is higher than the NAV, the ETF is said to be trading at a premium. This means you are paying more than the actual underlying value of the assets it holds.
• Trading at a Discount: When the market price is lower than the NAV, the ETF is said to be trading at a discount. This means you are paying less than the actual underlying value of the assets it holds.

Why does this gap exist?

The difference between the market price and NAV is usually tiny when an ETF is highly popular and actively traded. For example, ETFs tracking large, well-known indices like the Nifty 50 or Sensex tend to have very small premiums or discounts because there are always many buyers and sellers, keeping the price close to its fair value. Market makers (specialised financial firms) also play a crucial role here, stepping in to buy or sell ETF units to keep the market price aligned with the NAV.

However, the gap can become wider under certain conditions:

• Niche Themes: ETFs based on very specific or less common themes (e.g., a “Green Energy” ETF or a “Space Exploration” ETF that’s not widely popular).
• International Stocks: ETFs that hold foreign stocks. These can have wider premiums/discounts due to different trading hours, currency fluctuations, and less direct market access for arbitrage.
• Low Trading Volume: If an ETF doesn’t see much buying and selling activity during the day (i.e., it has low liquidity), the market price can easily drift away from the NAV. There might not be enough market makers or investors to quickly correct any discrepancies.
• Market Volatility: During periods of high market stress or volatility, even popular ETFs can sometimes experience wider premiums or discounts as market participants react quickly.

That’s why it’s incredibly important to check the premium or discount before you decide to buy an ETF – especially if you’re looking at less common international or thematic funds. Even a difference of a few percentage points can quietly eat into your returns.

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How This Mismatch Directly Affects Your Returns

Let’s illustrate with an example to show how paying a premium or selling at a discount can impact your investment journey.

Scenario 1: Buying at a Premium

Suppose you want to invest in an ETF.

Metric	Value
Amount Invested	₹1,00,000
ETF Market Price (at entry)	₹103
ETF NAV (at entry)	₹100
Premium	3%
NAV Increase (over time)	10%

You invest ₹1 lakh in an ETF that is currently trading at a 3% premium (meaning the market price is ₹103 when the NAV is ₹100).

Let’s say over your holding period, the underlying assets of the ETF perform well, and its NAV increases by a healthy 10%. So, the NAV rises from ₹100 to ₹110.

If you were able to sell exactly at NAV, your investment would be worth ₹1,10,000 (a 10% return). However, because you initially overpaid by 3% (bought at ₹103 for every ₹100 of actual value), your effective return is actually lower. You started from a disadvantage. In this simplified example, even though the underlying value grew by 10%, your personal return would effectively be closer to 7% (10% actual gain – 3% overpaid premium).

Scenario 2: Exiting at a Discount

Similarly, exiting your ETF at a discount can severely hurt your returns, especially in choppy or less liquid markets. If there are fewer buyers for a particular ETF, you might have to sell your units at a price lower than its actual NAV just to find a willing buyer. This means you get less money for your investment than it’s truly worth.

How to Avoid Overpaying for Your ETF

Don’t worry, being aware of this potential trap is half the battle. Here are practical steps you can take to ensure you’re getting a fair deal when buying or selling ETFs:

1. Compare Market Price with NAV: Always, always, always check the market price against the latest available NAV before placing your order. If the market price is more than 1% to 1.5% higher than the NAV, that’s a clear red flag indicating a premium.
2. Wait for the Premium to Come Down: If you see a significant premium, don’t rush. Unless you have an urgent need to invest, it might be wise to wait. Premiums can often shrink as more market participants enter the fray or as market makers facilitate arbitrage.
3. Use a Limit Order: Instead of placing a “market order” (which means you’ll buy at whatever the current market price is), use a limit order. A limit order allows you to specify the maximum price you are willing to pay per unit. For example, if the NAV is ₹100, you might set a limit order to buy at ₹100.50. Your order will only be executed if the market price falls to or below your specified limit. This protects you from overpaying.
4. Consider Another the ETF you’re looking at consistently trades at a high premium, check if there’s another ETF that tracks the exact same index or asset class but trades with better liquidity and a tighter premium/discount. Sometimes, simply choosing an alternative can save you money.
5. Check the iNAV (Indicative Net Asset Value):Many Asset Management Companies (AMCs) publish what’s called the iNAV during market hours. The iNAV is a near real-time estimate of the ETF’s fair value. Unlike the official NAV (which is calculated only at market close), the iNAV is continuously updated based on the live prices of the underlying assets.Think of the iNAV as your intraday benchmark. If the market price you see on the exchange is significantly higher than the iNAV, you’re likely paying too much at that very moment. The iNAV acts as your vigilant guard, helping you avoid overpaying during the trading day itself.

Here’s a quick comparison of the three price points:

Price Type	What it tells you	When it’s available	Key Use
NAV	The actual worth of the ETF’s underlying assets.	Once a day, after market close	Post-facto valuation, long-term tracking.
Market Price	What you pay/receive on the stock exchange right now.	Continuously throughout trading hours	Your transaction price.
iNAV	A real-time estimate of the ETF’s fair value.	Continuously throughout trading hours	Intraday benchmark to avoid overpaying.

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The Bottom Line

In the dynamic world of ETFs, knowing just one price isn’t enough.

• NAV tells you what your ETF is truly worth.
• Market Price tells you what you’re actually paying (or receiving).
• iNAV helps you judge whether the market price is fair right now.

Before you click that “buy” button, take a moment to check all three. Because in the ETF world, the seemingly small cost of not knowing the difference between these prices can quietly, but significantly, shrink your returns over time. Being an informed investor means understanding these nuances and using them to your advantage.

FAQs (Frequently Asked Questions )

1. Why do ETFs have two prices?
   ETFs have a Net Asset Value (NAV), which is the calculated value of their underlying holdings after market close, and a Market Price, which is the real-time price at which they trade on the stock exchange based on demand and supply.
2. What is the difference between an ETF trading at a premium versus a discount?
   An ETF is trading at a premium when its market price is higher than its NAV, meaning you’re paying more than the underlying assets are worth. It’s trading at a discount when its market price is lower than its NAV, meaning you’re paying less.
3. How does buying an ETF at a premium affect my returns?
   Buying an ETF at a premium means you’re overpaying for the underlying assets. Even if the ETF’s NAV increases, your actual percentage return will be lower because your initial cost basis was inflated.
4. What is iNAV and why is it important for ETF investors in India?
   iNAV, or Indicative Net Asset Value, is a near real-time estimate of an ETF’s fair value published by AMCs during market hours. For Indian investors, comparing the market price to iNAV helps determine if the current trading price is fair and helps avoid overpaying during intraday trading.
5. What strategies can I use to avoid overpaying for an ETF?
   You can compare the market price to the NAV and iNAV, wait for significant premiums to subside, use limit orders instead of market orders, and consider alternative ETFs that track the same index with better liquidity.