Why are overseas ETFs trading at a premium for Indian investors?

Overseas ETFs are trading at a premium because demand has outstripped supply due to RBI's overseas investment limits for mutual funds, preventing new units from being created while investors continue to trade in the secondary market.

What is the risk for Indian investors buying international ETFs at a premium?

Investors buying international ETFs at a premium risk significant capital loss if the Reserve Bank of India increases or lifts its overseas investment limits, which could cause these premiums to evaporate rapidly.

How did international funds perform compared to Indian markets recently?

International funds averaged 28% returns over the last year, significantly outperforming the Nifty, which returned 12.8% during the same period.

Home / Business and Economy / Premium Trap: Overseas ETFs Risk Capital for Indian Investors

Premium Trap: Overseas ETFs Risk Capital for Indian Investors

24 Feb

•

Summary

ETFs trade at a significant premium, risking capital for investors.
RBI overseas investment limits have closed many mutual fund schemes.
International funds returned 28% last year, Nifty returned 12.8%.

Premium Trap: Overseas ETFs Risk Capital for Indian Investors

Retail investors are increasingly allocating funds to international mutual schemes and ETFs, attracted by their higher returns compared to local equities over the past year. However, many of these popular overseas ETFs are currently trading at a substantial premium of 20-25% to their net asset values, exposing investors to potential sharp reversals.

The Reserve Bank of India's mandated overseas investment limit for mutual funds, capped at $7 billion, has led to many schemes being closed for fresh subscriptions. This has intensified demand for ETFs, which trade on exchanges and are now being bought at significant premiums over their daily prices.