Wait for NAV and price on exchange to converge before investing

Indian investors seeking to diversify their portfolios through overseas exchange-traded funds (ETFs) are paying a premium. Units of ETFs tracking global indices are trading above their net asset values (NAV). This raises concerns about whether these investments still make sense. 

Why ETFs trade at a premium 

The premium is the result of limited supply. Indian fund houses have cumulatively hit the investment ceiling set by the Reserve Bank of India (RBI): $7 billion for overseas mutual fund (MF) investments and $1 billion for investments in units of overseas ETF. Individual fund houses, barring a few, have also reached the limits set for each of them. With no 

 

fresh unit creation taking  place, investors must buy from existing holders, leading to inflated prices. 

“Mutual funds are not able to create fresh units of ETFs by buying underlying overseas securities. Hence, authorised participants and liquidity providers cannot sell fresh units on the exchanges to meet investor demand. Due to this restriction, existing ETF units are trading at a premium to their NAVs as investor demand to invest in US and Chinese markets is high,” says Siddharth Srivastava, head-ETF product and fund manager, Mirae Asset Investment Managers (India). 

For example, the Motilal Oswal Nasdaq 100 ETF (MON100) traded at Rs 214.5 compared to its i-NAV (indicative NAV) of Rs 181.4 on December 26, 2024 — an 18.2 per cent premium. MON100, the largest international mutual fund scheme in India, managed assets worth Rs 8,778 as of November 30, 2024.

 

 

Risks of premium pricing 

Investors focused solely on potential gains may overlook the risk of the premium 

evaporating. This can happen if ETF prices converge with NAV due to increased supply or shifting investor sentiment. This can result in losses for those holding overpriced units. 

“If an investor invests at the point when the NAV and the market price start converging, they will likely experience  negative returns,” says  Feroze Azeez, deputy chief executive officer (CEO), Anand Rathi Wealth.

  If an investor buys an ETF at a price premium, she is effectively buying units at a price higher than fair value. “Their returns may most likely be lower than actual ETF returns, especially if the premium reduces in future. In these scenarios, investor return will differ from the ETF return,” says Srivastava. 

What should you do? 

Before buying, investors should check the i-NAV on stock exchanges and aim for trades close to this value. “Investors should always compare the i-NAV with ETF prices on the exchanges before buying or selling ETF units. Considering the current scenario when overseas ETFs are trading at a premium as high as around 18 per cent, investors should stay away from buying them from the exchanges.  They should ideally wait for the i-NAV/NAV and exchange prices to converge,” says Srivastava.

Avoid paying excessive  premiums. “Though there is no universal benchmark for acceptable premium or discount levels, one can look at the NAV +/- 1 per cent as an acceptable level. If the premium is very high, one can avoid buying,” says S Sridharan, founder and CEO, Wallet Wealth. 

Experts also recommend limiting global exposure. “One should not invest more than 5-10 per cent of their overall portfolio exposure in global or international funds,” says Azeez.