The number of Indians investing in overseas markets has shot up over the past few years. However, many popular international funds are now closed for fresh investments as they have hit regulatory limits and fund-specific caps, leaving investors with few options.
In January 2022, the mutual fund industry hit Sebi’s $7 billion industry-wide limit on mutual funds investing in overseas equities. The markets regulator asked fund houses to stop investing overseas, after which many fund houses stopped accepting lump sums for such investments. On 10 December 2024, two prominent overseas funds – Motilal Oswal Nasdaq 100 fund and Motilal Oswal S&P 500 fund – suspended SIP investments as well.
Also read: What is the total cost of owning an ETF?
Now, you may ask, “Isn’t investing through exchange-traded funds (ETFs) the better option anyway?”
Well, not always. Motilal Oswal Asset Management Company (AMC) said in a recent note that it had observed unusually high premiums in the trading prices of Motilal Oswal Nasdaq 200 ETF and Motilal Oswal Nasdaq Q50 ETF.
What’s the issue?
The trading price of an ETF should ideally be close to its intraday net asset value (iNAV), which represents the value of the underlying securities. When there is huge demand for ETF units, market makers buy those units from AMCs and supply them to the exchange. This helps keep the trading prices of ETFs close to their iNAVs.
However, the Reserve Bank of India (RBI) also limits how much AMCs can invest overseas. Currently, this limit is $7 billion for the entire industry and $1 billion per AMC.
Owing to these restrictions, Motilal Oswal AMC is unable to create new units of the Nasdaq 100 and Q50 ETFs and supply them to investors through market makers.
What’s the impact on ETF prices?
This inability to create new units restricts the ETF’s supply. Meanwhile, demand for such ETFs has remained high. This mismatch between supply and demand has caused the trading prices of ETFs to deviate significantly from their iNAVs, creating a substantial premium. Currently, the two Motilal ETFs above are trading at a 9.5% premium to their iNAVs.
What should you do?
Unusually high premiums adversely impact returns. Investors should compare the trading price of an ETF with its iNAV before deciding whether to buy.
Is there an alternative?
Yes, but it comes with its own set of challenges. With many funds closed to new investments, some investors use their foreign exchange quota under the RBI’s Liberalised Remittance Scheme (LRS) to invest in overseas equities directly. However, this approach has higher costs, currency conversion fees, and complex tax-compliance requirements.
Abhishek Kumar, a Sebi-registered investment advisor, said, “Investors are caught between a rock and a hard place until RBI relaxes its restrictions, but given the pressure on the Indian rupee, we don’t think that’s going to happen any time soon.”
