Why does international ETF trade on premium and how investors can avoid paying more

Imagine that you want to invest in an exchange-traded fund (ETF) that travers the global index. The fund’s net asset value (NAV) is Rs 100, though the market price is Rs 110. Will you voluntarily pay a 10% premium? Not likely. However, this is happening with many international ETFs in India. Some are trading at a premium of up to 25%, which makes it expensive for investors to gain global diversity.

So, why does this ETF trade on a premium, how do these options affect investors’ returns and what options exist to avoid paying? Let’s break it.

Why does the International ETF trade on premium?

Regulatory restrictions are the main reason behind price deformity. Securities and Exchange Board India F India (SEBI) and Reserve Bank India F India (RBI) impose strict limits on foreign investments through mutual funds. According to these guidelines, Indian mutual funds can invest $ 1 billion in foreign equity, with a different sub-limits of $ 1 billion for international ETFs. These caps have been unchanged for almost a decade.

These limits reached 2022, leading Sebi to instructing asset management companies (AMCs) to stop accepting fresh flow in this ETF. While existing ETF units continue to trade on the stock exchange, AMC will no longer be able to issue new units to meet the new demand. This creates a supply crunch when investors’ interest is increasing, causing ETF prices higher than their NAVOs.

The effect of a premium on return

The cost of the ETF is ideally arranged with its NAV, which represents the overall value of its underlying property. However, a significant price affecting investors’ returns has led to a significant price premium.

For example, if the ETF has an NAV of Rs 100 but is trading at Rs 115, new investors must also make an additional 15% return to break. This premium effectively reduces the potential benefits and is open to the reduced reduction of investors if the ETF prices are appropriate.

Currently, all six international ETFs are trading on a premium in India:

Risks to Buying ETFs on Premium

HIST, ETF premium has been in the 5% range, but the recent demand increase has pushed them to uncomfortable levels. While some ETFs turn their prices and NAVOs in the days, others will take 240 days. In most cases, the price conversion occurs in one year, that is, investors purchased at premium can suffer in short term.

ETF Premium How to Track Track and Avoid

To avoid further payments, investors should compare ETF trading prices with its indicator NAV, which reflects the real-time value of the holdings within it. Funding houses often update stock exchanges like their websites and BSE.

If the trading cost of the ETF continuously exceeds its INAV, it is a clear indication that the funds traded on the premium. In such cases, investors should reconsider their entry points to avoid further payments or use a limit order instead of market order.

A smart option: Investing directly by LRS

For investors who want to bypass this ETF premium, a viable option exists: foreign investment directly by liberal remittance scheme (LRS). Under LRS, Indian investors can pay up to 250,000 per year, to invest in global markets.

By investing directly in US-listed ETFs or stocks, investors may avoid paying erectile premiums and ensure that their purchase price closely matches the real value of the property. This approach not only improves the potential return but also provides more relief in the selection of property.

Should you avoid international ETFs?

Despite their shortcomings, international ETFs are a convenient way to get in touch with global markets. However, investors should be careful when the premium is high.

If you prefer to invest by ETF, consider:

• Using a limit order to avoid further payments.
• Inspection of regulatory updates, such as the increase in Sebi’s foreign investment limit, can reduce ETF premium in the future.
• Waiting for a price correction or exploring direct investment by LRS.

Ultimate ideas

Current premiums on international ETFs highlight the main challenge in global investment-a regulatory barrier creates an artificial supply-demand imbalance. While ETF offers an easy way for diversity, their erectile prices reduce the return and increase the risks. Investors should carefully evaluate the NAV premium before purchasing and exploring direct investment options through LRS for a further cost-effective approach.

In investment, J Knowledge is the power. Understanding ETF Premium and NAV Conversion, investors can make informed decisions and maximize the possibility of their global investment without unnecessary expenses.

(The author of the article is Viram Shah, the founder and CEO, Vested Finance)