Several international exchange-traded funds (ETFs) listed in India are trading at steep premiums to their indicative net asset value (iNAV)—the real-time value of a fund's underlying holdings.
Around 2.20 pm on 9 September, Motilal Oswal Nasdaq Q50 ETF traded at about a 96% premium to its iNAV. Motilal Oswal Nasdaq 100 ETF and Mirae Asset Hang Seng Tech ETF were each at roughly 27%, while Mirae Asset NYSE FANG+ ETF traded at about 39%.
International ETFs have traded above iNAV for a while, ever since the mutual fund industry exhausted its overseas investment limits. The Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI) cap overseas investment at $7 billion for the industry and $1 billion per fund house. With the ceiling reached, fund houses cannot create new ETF units, leaving a supply-and-demand mismatch that pushes existing units above fair value.
How the new rules feed the premium
Industry experts say the premiums have sharpened further since Sebi's new ETF price-band rules took effect on 7 September. The band is now anchored to the previous day's closing price rather than the iNAV.
"Under the new rules, the price band for ETFs is anchored to the previous day's closing price instead of the NAV. For international ETFs that already trade at a premium, the reference point itself is inflated. As the circuit limits are dynamically adjusted off that price each day, the premiums keep building," said an industry expert, who requested anonymity.
Under the framework, equity ETFs get a dynamic price band starting at ±10%, which can widen to ±20% after a cooling-off period.
What should investors do?
For those seeking global diversification, the direct route now looks more practical than buying these ETFs at a premium. Under the RBI's Liberalised Remittance Scheme (LRS), individuals can remit up to $250,000 a financial year and invest directly in ETFs listed on US exchanges. Several dealer-brokers and platforms offer this facility, though it involves currency conversion and brokerage costs, and foreign holdings must be reported under Schedule FA of the income-tax return.
Outbound fund-of-funds (FoFs) based in Gift City's International Financial Services Centre are another option, and stay outside these overseas limits.
International exposure can help cushion the impact of rupee depreciation, but advisers suggest building it gradually. A typical allocation is 10-30% of the portfolio, given how sharply US markets have already run up. Just as important, they should watch how much premium they pay—paying a heavy premium for access can erode the diversification benefit.