The growing interest in international investments has created a unique dynamic in the Indian financial landscape. International Exchange-Traded Funds (ETFs) have become a preferred route for many investors seeking exposure to global markets. However, regulatory constraints and market trends have resulted in these ETFs trading at unprecedented premiums, leaving investors wondering: Is it worth the cost?
ETFs are designed to closely track the value of their underlying assets using an arbitrage mechanism. However, many international ETFs in India are now trading at premiums of 15–20% above their Net Asset Values (NAVs). This anomaly stems from regulatory restrictions imposed by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI).
Mutual funds can invest only $7 billion in foreign equities and $1 billion in international ETFs. These caps, unchanged for nearly a decade, have created an artificial scarcity of ETF units, driving up their prices. The demand-supply mismatch has disrupted the typical price alignment, making these ETFs significantly more expensive than their actual value.
Investors can determine whether an ETF is trading at a premium by comparing its indicative NAV (iNAV) with the market trading price. NAVs are published daily on the Association of Mutual Funds in India (AMFI) website, while iNAVs are updated frequently on exchange websites. If the trading price exceeds the iNAV, the ETF is trading at a premium.
For instance, investors interested in popular ETFs like the Motilal Oswal NASDAQ 100 or the Mirae Asset Bank Plus ETF can use this comparison method to assess whether these funds are overpriced.
Global diversification remains a key driver for the popularity of international ETFs. Following the recent U.S. elections, international markets have garnered attention, particularly tech-heavy indices like the NASDAQ 100. These funds provide exposure to cutting-edge industries, including artificial intelligence (AI), cloud computing, and digital transformation.
However, the enthusiasm for these ETFs comes with a caveat—the inflated pricing mechanisms currently in play. Investors must weigh the benefits of diversification against the potential erosion of returns due to high premiums.
For investors deterred by high ETF premiums, the Liberalised Remittance Scheme (LRS) offers an alternative. Under the LRS, individuals can invest up to $250,000 annually in foreign assets. While there is a 20% Tax Collected at Source (TCS), this is not a final tax. It can be claimed as a credit during income tax filing, potentially making the LRS more cost-effective than premium-laden ETFs.
By directly accessing international markets, investors under the LRS can bypass the scarcity-driven price hikes in domestic ETFs, enjoying greater flexibility and potentially higher returns.
If you’re holding international ETFs with premiums exceeding 15%, it’s time to reassess your position. Compare the total cost of holding these ETFs against direct investments via the LRS. Factor in the tax implications, including TCS credits, to determine the most financially prudent approach.
While ETFs offer convenience, the current market dynamics make them a less attractive option for cost-conscious investors. Staying informed and flexible is critical to navigating these challenges.
This analysis is not about creating panic but about fostering informed decision-making. Many investors are drawn to international ETFs without fully understanding their pricing dynamics. Eventually, when ETF prices realign with their NAVs, the returns could normalise, potentially catching unprepared investors off-guard.
The international investment landscape is fluid. Regulatory changes, market shifts, and emerging opportunities will continue to shape it. Successful investors will adapt by staying analytical, flexible, and well-informed.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
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