Sebi's new ETF framework: How will it impact investors? Experts answer

A retail investor buying an exchange-traded fund (ETF) during a volatile trading session could end up paying a price that had little connection with where the underlying market was actually trading.

That's because India's ETF market has long operated with price bands linked to valuations that were already two trading days old. The disconnect became particularly evident during recent episodes in gold and silver ETFs, where market prices diverged sharply from the value of the underlying assets.

The Securities and Exchange Board of India (Sebi) is now attempting to close that gap. From 1 September, ETF price bands will be determined using the previous day's closing market price instead of a T-2 NAV-based reference. The regulator has also introduced dynamic price bands and a pre-open auction mechanism for gold and silver ETFs to improve price discovery.

The changes are expected to make ETF trading more efficient. But will they actually result in fairer prices for investors? And what do they mean for traders, long-term investors and those looking to exit during volatile markets? We asked the experts.

How will ETF investing experience change for retail investors?

According to Shweta Rajani, associate director at Anand Rathi Wealth Ltd, the reforms are aimed at ensuring ETF prices reflect prevailing market conditions more efficiently.

"Sebi is trying to build a framework where ETF prices reflect actual market conditions more efficiently, with the broader objective of ensuring investors get the right price at the right time," she said.

The need for reform became evident during a series of market events over the past two years.

Rajani points to sharp moves in gold prices during March 2025, which exposed the limitations of using a two-day-old reference price. More recently, in January 2026, several silver ETFs traded at premiums of nearly 14-16% above their underlying value amid speculative buying. When those premiums corrected, some ETFs saw double-digit declines in a single day despite silver prices falling only around 2-3%.

"Such events reinforced the need for a stronger price discovery framework that keeps ETF prices better aligned with their underlying value," she said.

For retail investors, the biggest change is expected to be a smoother trading experience, particularly during periods of volatility. ETF prices should remain more closely aligned with the value of the underlying assets, while the introduction of pre-open auctions for gold and silver ETFs could reduce sharp price swings at the start of trading sessions.

Tejas Khoday, Co-Founder and CEO of FYERS, calls the move a long-overdue correction.

"For years, an ETF's trading range was anchored to a price that was two days old, with the same fixed band applied to every ETF regardless of how the underlying was actually moving. That created moments where the price on screen simply didn't reflect reality and retail investors quietly paid for it on both entry and exit," he said.

Will ETF premiums and discounts reduce?

Not necessarily, say experts.

While the reforms should improve price discovery and keep ETF prices closer to their underlying value, investors should not expect premiums and discounts to disappear altogether.

"Investors should expect ETF prices to stay more closely aligned with their underlying value rather than expect a meaningful reduction in premiums or discounts," Rajani said.

According to her, the move to a more current reference price, dynamic price bands and pre-open auctions strengthens the overall price discovery process. The outcome is likely to be more efficient trading rather than a dramatic narrowing of premiums and discounts.

Khoday says the new framework should allow ETF prices to respond more accurately to movements in the underlying asset.

"The new dynamic bands start tighter and widen only when the underlying genuinely moves, so prices track the market far more honestly," he said.

Will trading halts make it harder to exit during a market sell-off?

One concern among investors is whether the new framework could make it difficult to exit positions when markets are falling sharply.

Rajani says that is not the intent of the mechanism.

"Investors need to understand that the objective of this framework is not to stop them from exiting during periods of market stress, but to ensure that markets remain orderly even when prices move sharply," she said.

Under the new framework, if an ETF hits its price limit, trading pauses only briefly before the price band is widened and trading resumes. For gold and silver ETFs, trading pauses when prices move beyond 5.9% from the base price. The pause lasts 15 minutes, or five minutes during the final 30 minutes of trading. After that, the price band expands by three percentage points and can continue widening if market conditions require it.

Rajani notes that another important safeguard is the shift from a T-2 NAV-based reference to a T-1 market-based reference price.

"This means the opening price is likely to be much closer to prevailing market conditions, reducing the chances of unnecessary trading pauses," she said.

Khoday views the cooling-off periods as a sensible compromise.

"Instead of a hard halt during a sharp move, you get a brief pause that prevents panic without trapping anyone," he said.

Are the benefits mainly for traders, or will long-term investors gain too?

The reforms are likely to benefit both groups, although in different ways. For traders, the advantages are immediate. Better price discovery and more responsive trading bands can improve execution during volatile sessions. For long-term investors, the gains are subtler.

"A more market-linked pricing framework ensures ETFs remain better aligned with the value of their underlying assets over time, reducing temporary pricing distortions whenever investors buy, sell or rebalance their ETF investments," Rajani said.

She added that in the case of gold ETFs, the reforms complement the earlier move to domestic market-based pricing, helping returns track India's gold market more closely.

Khoday says the benefits may accumulate over time for long-term investors.

"For long-term investors, it means smaller gaps between price and value at the moments that matter and that quietly adds up over the years," he said.

What mistakes should investors still avoid?

Both experts caution that better market infrastructure does not change the basics of investing.

Rajani says investors should continue to avoid chasing short-term market movements, buying ETFs solely based on recent performance or investing without understanding the underlying asset.

"It is equally important to choose ETFs with adequate liquidity and ensure they align with one's investment objectives and asset allocation," she said.

Khoday's advice is also on similar lines.

"Stick to ETFs with healthy volumes, use limit orders, and check what the fund actually tracks before you buy. The framework improves the plumbing, it doesn't create liquidity where none exists," he said.

He added that ETFs work best as long-term portfolio building blocks and that excessive trading can erode gains through costs and taxes.

The reforms may not eliminate pricing gaps entirely. But experts believe the shift to a more market-linked framework should help ETF prices stay closer to their underlying value, particularly during periods of sharp market movement. For investors, that could mean a smoother trading experience and greater confidence that the price on screen more accurately reflects market reality.