Indian global ETFs trade at steep premiums as foreign investment caps restrict fresh units

All six international exchange-traded funds in India were trading at a high premium on 30 September, with the average premium hitting 30.4% according to a Mint analysis of Value Research data. The Motilal Oswal Nasdaq Q50 ETF recorded the highest premium at 63%. An ETF trades at a premium when its market price goes above its net asset value, which represents the value of its underlying holdings. Two years earlier on 30 September 2024, three of the six ETFs traded at a discount on the NSE and BSE, with the same Motilal Oswal fund showing the steepest discount at 4% on both exchanges.

The Causes

The gap is driven by a mismatch between demand and supply. Regulatory limits on overseas investments by Indian mutual funds restrict their ability to buy foreign securities and create fresh ETF units. The Reserve Bank of India allows the mutual fund industry to invest up to $7 billion in overseas non-exchange-traded funds and $1 billion in global ETFs. The Securities and Exchange Board of India permits each asset management company to invest up to $1 billion in non-ETF investments and $300 million in ETFs after fresh allocations were halted when aggregate ceilings were breached in 2022 and 2024. Anil Ghelani, head of passive investments and products at DSP Mutual Fund, noted that limits have compromised AMCs in buying underlying international stocks. At the same time, demand for global exposure has risen as investors seek diversification beyond Indian equities, with global markets performing well while Indian markets stayed flattish over the last 18 to 24 months. Investment in overseas equity and debt under the Liberalized Remittance Scheme stood at $2.6 billion in FY2026 and more than doubled to $344.57 million in July 2026 from $156.19 million a year earlier.

Market Impact

India's international ETFs are dominated by Motilal Oswal Mutual Fund, Mirae Asset Investment Managers, and Nippon India Mutual Fund, while Kotak Mahindra Mutual Fund and HDFC Mutual Fund offer international exposure through fund-of-funds products. Dhirendra Kumar, founder and chief executive at Value Research, stated that the premiums create a divide of sophistication where investors who manage LRS paperwork pay fair value while smaller investors pay the markup. The premium also brings extra risk because if a 50% premium disappears while the NAV stays unchanged, the market value falls by about 33%. Viram Shah, founder and chief executive of Vested, noted that direct investing offers greater transparency over price without elevated premiums. However, direct overseas investing remains cumbersome, requiring an international brokerage account, remitting funds through a bank, and converting rupees into foreign currency with extra costs like brokerage, forex mark-ups, and tax collected at source. Sebi's revised price-band framework, effective 7 September 2026, shifted the daily price band reference from the NAV two trading days earlier to the previous day's closing price based on the volume-weighted average price during the last 30 minutes of trading, which raised upper price bands rather than constraining the widening gap.

Context

Exchange-traded funds normally trade close to their net asset value because authorized participants arbitrage price differences. When regulatory caps prevent the creation of new units, this arbitrage mechanism breaks down and allows market prices to drift far above underlying asset values. Investors navigating these markets must weigh the simplicity of domestic rupee transactions against the heavy markups currently charged on international fund units.