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economictimes.indiatimes.com / 1 year ago
Why international ETFs are trading at a premium and how investors can avoid overpaying
exchange-traded fund (ETF) that tracks a global index. The fund’s net asset value (NAV) is Rs 100, yet the market price is Rs 110. Would you willingly pay a 10% premium? Likely not. However, this is exactly what’s happening with many international ETFs in India. Some are trading at a premium of up to 25%, making it costly for investors seeking global diversification.
So, why are these ETFs trading at a premium, how does this impact investor returns, and what alternatives exist to avoid overpaying? Let’s break it down.
Why Are International ETFs Trading at a Premium?
The primary reason behind the price distortion is regulatory restrictions. The Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) impose strict limits on overseas investments by mutual funds. According to these guidelines, Indian mutual funds can invest a total of $7 billion in foreign equities, with a separate sub-limit of $1 billion for international ETFs. These caps have remained unchanged for nearly a decade.
These limits were reached in 2022, leading SEBI to instruct asset management companies (AMCs) to stop accepting fresh inflows into these ETFs. While existing ETF units continue to trade on the stock exchange, AMCs can no longer issue new units to meet fresh demand. This creates a supply crunch while investor interest continues to grow, causing ETF prices to exceed their NAVs.
The Impact of Premiums on Returns
An ETF’s price should ideally align with its NAV, which represents the aggregate value of its underlying
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