ETF Liquidity Window: When You Can Redeem ETF Units Directly With the AMC

The ETF liquidity window is a small rule in SEBI’s mutual fund rulebook that most ETF holders never hear about until they need it. Normally you buy and sell ETF units on the exchange, like a share. But if that exchange market dries up, or the price slips well below the fund’s real value for days on end, SEBI lets you skip the market and redeem your units directly with the fund house. This guide walks through exactly when that door opens, how the three triggers work, and what we think an ordinary investor should actually do with this information.

Everything below about the rule itself comes from the SEBI Master Circular for Mutual Funds dated March 20, 2026, mainly paragraphs 4.5.1 to 4.5.3 and Annexure 2. The worked examples use made-up numbers, and we say so each time.

Why an ETF needs a liquidity window at all

An ETF has two prices. One is the NAV, the value of the basket of stocks or bonds the fund holds, worked out at the end of the day. The other is the traded price on NSE or BSE, which is whatever buyers and sellers agree on at that moment. Most of the time the two sit close together.

What keeps them close is a creation and redemption mechanism. Large players can hand the fund house a basket of the underlying securities and get fresh ETF units, or return units and take the basket back. These transactions happen in big fixed blocks called creation units. As the Wikipedia entry on exchange-traded funds explains, the profit motive behind that arbitrage is what tends to drag the market price back towards NAV, though deviations can and do happen.

A retail investor with a few thousand units can’t use that machinery. You are stuck with the exchange. If nobody is bidding, or the only bids are well below NAV, you either wait or sell at a loss that has nothing to do with the underlying holdings. That gap is the problem the liquidity window is meant to close.

The normal rule: direct dealing with the AMC is for big tickets

Start with the default position. Under paragraph 4.5.2 of the master circular, investors can transact directly with the AMC (subscribe or redeem) only for transactions greater than Rs 25 crore. That threshold does not apply to market makers, and SEBI says it will be reviewed periodically.

So for almost every individual, the exchange is the only route in and out. The liquidity window is the exception carved out of that rule, and it runs the other way: it is for smaller redemptions, up to Rs 25 crore, and only when the market has visibly failed the investor.

The liquidity window isn’t a second exit you can use whenever you like. It opens only when the exchange market for that ETF has broken down by one of three measurable tests.

The three triggers that open the ETF liquidity window

Paragraph 4.5.3 says investors can approach the AMC directly to redeem ETF units, for transactions up to Rs 25 crore and without any exit load, in any one of these situations:

1. Persistent discount. The traded closing price of the ETF is at a discount of more than 1% to the day-end NAV for 7 continuous trading days.
2. No quotes. No quotes for the ETF are available on the stock exchange(s) for 3 consecutive trading days.
3. Thin bids. The total bid size on the exchange is less than half of the creation unit size daily, averaged over 7 consecutive trading days.

Each one is a test you can check from data, not a judgement call. Note the wording of the first trigger: it is the closing price against the day-end NAV, not some intraday dip. A stock that trades at a 2% discount for ten minutes at 11 am doesn’t count.

How redemption works once the window is open

When one of these scenarios applies, redemption applications received from investors up to 3:00 pm on any trading day are processed at that day’s closing NAV. The AMC has to track these instances on a continuous basis and, if any of the scenarios arises, disclose it on its website.

That last part is the practical bit. You don’t need to compute the triggers yourself from raw exchange data. The fund house is supposed to put it up. If you hold a small or thinly traded ETF, the AMC’s website is the place to check.

Worked example 1: the 1% discount test

Take a hypothetical equity ETF, call it XYZ Nifty ETF. Here are seven straight trading days of day-end NAV and closing price. All numbers are invented for illustration.

The discount here is (NAV minus closing price) divided by NAV. Every one of the seven days is above 1%, and the days are continuous, so the first trigger is met.

Now change one number. Suppose on day 5 the ETF closed at Rs 99.70 instead of Rs 99.50. The discount that day becomes 0.89%. The streak breaks, and the count would have to start again from day 6. That’s the point of a hard rule: six bad days out of seven don’t qualify.

Worked example 2: the bid-size test

The third trigger trips people up because it is about depth, not price. Say our hypothetical ETF has a creation unit size of 50,000 units. Half of that is 25,000 units. The total bid quantity sitting on the exchange on seven consecutive trading days looks like this (again, invented figures):

18,000, 22,000, 31,000, 20,000, 26,000, 19,000 and 21,000 units.

Add them up and divide by seven and you get an average of roughly 22,429 units. That is below 25,000, so the thin-bids trigger is met, even though two individual days were above the line. The test is the seven-day average, not each day separately.

Swap in bigger numbers on days 5 and 6, say 46,000 and 39,000 units, and the average climbs to about 28,143. Now the condition fails. Two busy days were enough to keep the window shut.

A seven-day average means one or two lively sessions can keep the window closed, even if the rest of the week was dead.

Worked example 3: who actually uses it

Picture an investor holding 10,000 units of the same hypothetical ETF, with a closing NAV of Rs 99.90 on the day the window is open. The holding is worth about Rs 9.99 lakh at NAV. That’s comfortably inside the Rs 25 crore cap, so the investor can send a redemption request to the AMC. If it reaches the AMC by 3:00 pm, it is processed at that day’s closing NAV, with no exit load.

Compare that with selling on the exchange at a closing price 1.1% below NAV. On this hypothetical holding, that gap is close to Rs 11,000. For a long-term investor, that’s real money lost to a broken market rather than to anything the underlying stocks did.

Where market makers fit in

The liquidity window is really a backstop. The first line of defence is the market-making framework in paragraph 4.5.1 and Annexure 2 of the same circular.

• Every ETF must have at least two market makers, who are stock exchange members, to provide continuous liquidity on the exchange.
• Market makers deal with the AMC only in multiples of the creation unit size.
• A market maker has to give a two-way quote and guarantee execution at the quoted price and quantity.
• It has to make the market for at least 75% of the time during market hours on a trading day, and be present among the best buy and sell quotes, for example the top five.
• Any incentives paid to market makers are charged to the scheme within the permitted expense limit, and must be linked to performance, such as trading volume and bid-ask spreads.

If the market makers do their job, the three triggers should rarely fire. When one does, it usually tells you something about the ETF itself: a small fund, a niche index, or a debt or commodity product with little natural trading interest.

What the ETF liquidity window doesn’t do

It helps to be clear about the limits, because the rule is narrower than it sounds.

• It is redemption only. The paragraph talks about redeeming units with the AMC. It doesn’t give small investors a direct route to buy units from the fund house.
• It isn’t permanent. The window exists only while one of the three scenarios applies. Once trading returns to normal, you are back to the exchange.
• It doesn’t promise a better price than NAV. You get the closing NAV of the day, which may itself have fallen. The rule fixes the discount problem, not market risk.
• It has a ceiling. The window covers transactions up to Rs 25 crore. Larger tickets already have direct access under the separate rule above that amount.

A practical checklist before you buy any ETF

We’d rather you never need the window. A few habits help:

• Look at the bid-ask spread and the quantity on both sides of the order book before placing an order, not just the last traded price.
• Compare the market price with the ETF’s indicative NAV (iNAV) during the day. A persistent gap is an early warning.
• Check the tracking error too. A cheap ETF that drifts away from its index has a different problem from one that simply trades thin.
• Use limit orders in less liquid ETFs, so a thin book doesn’t fill you at a silly price.
• For small or niche ETFs, bookmark the AMC’s disclosure page, since that’s where the liquidity window announcement is supposed to appear.

Liquidity is part of risk, not a footnote to it. Our guide to risk management in trading covers how to size positions so that a slow exit doesn’t force a bad decision.

The short version

The ETF liquidity window lets you redeem ETF units directly with the AMC, up to Rs 25 crore and without exit load, but only when the exchange market has clearly failed: a discount above 1% to NAV for 7 straight trading days, no quotes for 3 consecutive trading days, or average daily bids below half the creation unit size over 7 consecutive trading days. Requests in by 3:00 pm get that day’s closing NAV, and the AMC has to flag these episodes on its website. Most of the time, in a large and actively traded ETF, you will never see it open. That’s how it should be.

Disclaimer: This article is for education only and is not investment advice. The examples use hypothetical numbers. Rules can change, so check the latest SEBI circulars and your fund’s scheme documents, and consult a SEBI-registered adviser before making investment decisions.