The premium effectively reduces potential gains and exposes investors to heightened downside risk if ETF prices fall.
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Artystarty
The prices of international-focused exchange traded funds are trading at premium over indicative NAV as investors rush to average their cost following the recent sharp fall in the US markets.
SEBI froze fresh inflows into international funds and ETFs last March after they hit the upper limit of $7 billion and $1 billion set by RBI, but investors can trade in the units of ETFs listed on the exchanges and in recent weeks there has been a spike in prices of ETFs.
For instance, Motilal Oswal Nasdaq Q50 ETF was trading at a premium of 10 per cent on the exchange at ₹69.59 on Friday against the i-NAV of ₹63 announced by the fund house. Nippon India ETF Hang Seng BeES was quoted at premium of ₹376 on Friday against its NAV of ₹333.
The premium effectively reduces potential gains and exposes investors to heightened downside risk if ETF prices fall. Ideally, ETF prices should align with its i-NAV, which represents the aggregate value of its underlying assets. However, the demand-supply mismatch has led to substantial price premiums, impacting investor returns.
Nikunj Saraf, VP, Choice Wealth said that the international ETFs in India are trading at significant premiums to their NAV driven primarily by regulatory constraints and heightened global diversification demand.
Purchasing ETFs at a premium requires investors to achieve an extra return merely to break even. In the short term, if the premium compresses through arbitrage mechanisms, investors might realise immediate losses despite favourable underlying asset performance, he added.
Investor interest
Feroze Azeez, Deputy CEO, Anand Rathi Wealth said international ETFs are at a premium, primarily due to strong recent performance and rising investor interest. Over the past six months, global funds particularly those focused on China and the US have outperformed Indian markets and this was driven by FIIs moving their investments to those countries, he added.
When it comes to international funds, he said it is not recommended to invest in funds based on the recent rally as it was largely driven by liquidity rather than any significant structural improvements in fundamentals, he said.
If an ETF trades at a premium consistently over its i-NAV, investors should reconsider their entry points or use limit orders instead of market orders to avoid overpaying, said a market expert.
For investors looking to bypass ETF premium on domestic exchanges they can do so by tapping into direct overseas investment through the Liberalized Remittance Scheme (LRS). Under LRS, Indian investors can remit up to $250,000 per year to invest in global markets.
Investors can avoid paying inflated premiums and ensure their purchase price closely matches the actual value of the assets. This approach not only improves potential returns but also provides greater flexibility in asset selection, he said.
Published on April 14, 2025