Indian investors continue to show a strong appetite for global equities. However, with regulatory limits blocking fresh overseas investments by mutual funds, the usual routes have largely been shut for nearly three years. As a result, many investors are turning to the only remaining accessible option: a handful of overseas exchange-traded funds listed on Indian exchanges.
The issue is not access but pricing. With no new ETF units being created and demand remaining strong, these products are trading at sizable premiums to their actual net asset value (NAV). Investors buying today may end up with diluted returns or even losses later, even if underlying global stocks perform well.
Why ETFs Are Trading at Premiums
Mutual funds breached their overseas investment limits in early 2022. Since then, schemes investing abroad – including ETF variants – have remained closed for fresh inflows. The ETF units already in circulation still trade on the exchanges, but asset managers cannot create new ones.
In a normal ETF, market price and NAV should stay aligned. When demand rises, new units are created and issued at NAV, keeping the traded price close to fair value. With creation suspended, ETF supply is fixed. Rising demand is now pushing traded prices far above intrinsic value.
This is visible through the gap between market price and iNAV (indicative NAV, which tracks real-time value of the ETF’s underlying holdings).
Premiums Are Significant
As of 7 November:
- Mirae Asset FANG+ ETF traded more than 21% above its NAV
- Mirae Asset S&P 500 Top 50 ETF was also 21% above NAV
- Nippon Hang Seng BeES closed 19% above NAV
- Motilal Oswal Nasdaq 100 ETF traded at an 8% premium
Investors buying at these levels are effectively overpaying for the same underlying basket of stocks.
How Premiums Can Hurt Returns
If the premium remains unchanged over the investment period, the return outcome matches the underlying NAV movement. The risk arises when the premium normalises.
Illustration
- Investor buys at ₹120; iNAV is ₹100 (20% premium)
- Underlying basket rises 10% over one year; iNAV becomes ₹110
If premium remains 20%, market price becomes ₹132 and investment value rises 10%.
However, if the premium disappears and the ETF trades at ₹110, the investor’s ₹1 lakh becomes ₹91,667 – a notional loss of over 8%, despite the ETF’s assets gaining 10%.
Put simply, future gains must first cover today’s premium before creating any real profit.
The Fund-of-Funds (FoF) Distortion
Investors are facing another anomaly in FoF variants of such ETFs.
- ETFs are valued based on NAV
- FoFs are valued based on the ETF’s traded price, not its NAV
As long as ETFs trade at a premium, FoF NAVs appear artificially higher, creating an illusion of outperformance.
Example over the last one year:
| Scheme | ETF return | FoF return |
| Mirae NYSE FANG+ | 37.6% | 68.8% |
| Mirae S&P 500 Top 50 | 23.8% | 44.9% |
| Motilal Oswal Nasdaq 100 | 24.8% | 34.8% |
This is not superior fund performance. It is a valuation distortion caused by ETF premiums. Once premiums shrink, FoF NAVs will correct rapidly.
Experts Advise Caution
“Sooner or later, this premium will evaporate. When prices converge to NAV, capital loss becomes a real possibility.”
– Vivek Banka, Goalteller
“If ETFs are valued using NAV, FoFs should follow the same convention. Using traded price creates misleading return profiles.”
– Kunal Valia, StatLane
Asset managers themselves acknowledge the problem.
Mirae Asset confirms that as long as overseas limits exist, premiums will remain elevated because supply cannot expand.
Strategic Guidance for Investors
Avoid buying global ETFs at sizeable premiums
- Check the iNAV vs market price before investing
- Fund houses publish live iNAV on their websites and stock exchanges
- A narrow bid-ask spread indicates healthier pricing
Beware of chasing FoF outperformance
- Reported returns may not represent real NAV growth
- When ETF premiums correct, FoF returns will fall sharply
Those already holding meaningful gains should consider profit-taking
ETF premiums have expanded over the last 12–18 months. Investors sitting on sizeable returns may wish to realise gains before both the market and premium compress simultaneously.
Do not assume global returns will compensate for overpayment
If global equities correct and premiums simultaneously collapse, losses may exceed the index drawdown.
Available Alternatives
For investors seeking offshore diversification today:
- Wait for limits to be revised and schemes to reopen
- Use GIFT City funds where permitted
- Open an international brokerage account (comes with higher cost and LRS compliance obligations)
- Avoid informal or opaque structures promising foreign exposure
Bottom Line
Regulatory restrictions have unintentionally pushed investors into a narrow corner. Demand-supply imbalance in overseas ETFs is inflating premiums, distorting NAVs, and creating a meaningful risk of value erosion.
The underlying global stocks may still perform well, but investors who enter through premium-inflated vehicles may not fully participate in those returns.
Until pricing normalises or overseas limits are revised, disciplined investors would be well served by caution, valuation checks, and selective profit booking.