There are investors out there who are strong believers in passive investing. And most of them want to make sure that they spend less money on fees when investing in passive products.
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One of the available options is an ETF. While ETFs are a great option if you are choosing passive investing.
But what we will talk about in this blog will be the use case of ETFs in overseas investing, and get into the details that are not discussed at large.
What Are ETFs?
An Exchange-Traded Fund (ETF) is a fund that holds a collection of assets such as stocks, bonds, or commodities and is traded on stock exchanges like a regular stock. Their prices fluctuate throughout the trading day, unlike mutual funds, whose NAV is displayed at the end of the day. ETFs are popular for their low costs, liquidity, and ease of trading.
How Do ETFs Work?
ETFs are supposed to track an index and generate returns close to the benchmark they are tracking. The returns are slightly less due to the expense ratio involved, but overall, they give returns close to their benchmark. In the case of NIFTYBEES, they will give returns close to Nifty 50.
How Do International ETFs Work?
Just like any other ETF, they also try to mimic the returns of the benchmark they are investing in. International ETFs buy stocks directly and hold them for investors in India, like the Nasdaq 100.
What is iNAV?
Most investors buy ETFs at the price they are trading on the stock exchange, but there is one more thing known as Indicative Net Asset Value (iNAV), which is a real-time estimate of an ETF’s value, calculated throughout the trading day using the latest market prices of its underlying assets.
This helps market participants identify whether an ETF is trading at a premium or discount to its actual value.
The RBI Limit
The Reserve Bank of India (RBI) has imposed a $7 billion limit on overseas investments for the entire MF industry in order to manage the foreign exchange reserve. Additionally, there is a $1 billion limit per Asset Management Company (AMC).
International ETFs with their price and iNAV as on 22 April 2025
| Ticker | iNAV | Price | Difference (%) |
|---|---|---|---|
| MAFANG | 112.5 | 91.08 | 23.52% |
| MAHKTECH | 21.32 | 17.92 | 18.97% |
| MON100 | 165.99 | 148.11 | 12.07% |
| HNGSNGBEES | 376.96 | 325.01 | 15.98% |
| MONQ50 | 67.51 | 61.29 | 10.15% |
Source: 1 Finance Research, Company Website
In the table, you can see that the Mirae Asset FANG+ ETF is trading at more than a 23% premium. What does this mean? Let’s say you invest in the ETF today, and if the price is correct, you will have to bear this 23.5% loss.
Even the Motilal Oswal Nasdaq 100 ETF, the one with the highest AUM in India, is trading at a 12% premium.
Why Are International ETFs Trading at a Premium?
International ETFs are trading at significant premiums due to a combination of regulatory and market factors:
1. RBI’s Overseas Investment Limits:
The Reserve Bank of India (RBI) caps mutual fund industry investments in overseas assets at $7 billion, with a $1 billion limit per Asset Management Company (AMC). This restriction, in place to manage India’s foreign exchange reserves and stabilize the rupee, was breached by the industry in February 2022.
As a result, AMCs cannot create new ETF units by purchasing additional overseas assets, freezing the supply of ETF shares.
2. Supply-Demand Imbalance:
With no new units being created, the supply of international ETF shares is fixed. Meanwhile, demand from Indian investors seeking global exposure continues to rise.
Basic economics kicks in: limited supply + high demand = higher prices. This pushes ETF
Suppose you invest ₹1,00,000 in the MAFANG ETF at ₹112.50 per unit (23.52% premium over its iNAV of ₹91.08). You buy approximately 889 units. If the underlying assets grow by 10% over a year, the iNAV rises to ₹100.19 per unit, and assuming the premium remains constant, the market price becomes ₹123.75 (₹112.5 + 10%)
Your portfolio value: 889 units × ₹123.75 = ₹1,09,994.
Effective return: ₹9,994 / ₹1,00,000 = 9.99%.
Without premium: If you had paid iNAV (₹91.08), your cost would be ₹80,970 for 889 units. With iNAV at ₹100.19, your portfolio would be worth ₹89,069, yielding a 10% return (matching the benchmark).
The 23.52% premium means you overpaid by ₹19,030 upfront, reducing your effective return despite the benchmark’s growth. If the premium narrows (e.g., to 10%), your market price drops closer to iNAV, potentially causing a loss if you sell.
What Should You Do As An Investor?
Check the Premium: Before buying an international ETF, compare its market price to its iNAV (available on the AMC’s website and broking platforms).
Explore Mutual Funds: Look for international mutual funds still accepting investments.
Conclusion
Diversifying into international markets can be a smart move, but not at any cost. If you are using ETFs for global exposure, always check their iNAV. A significant difference cannot be ignored, as you’ll have to recover the difference first before gaining anything. In such cases, explore alternative options by consulting with an investment advisor.
