Industry Odisha Bureau, Sep 13: International ETFs in India are trading well above their NAVs. Foreign investment limits and a new Sebi price band are behind this. Investors face risk if premiums narrow.
On 9 September, the Motilal Oswal Nasdaq Q50 ETF traded around ₹213. Its NAV that day was approximately ₹117. That gap represented an 81% premium. Between 4 and 9 September, the ETF’s market price rose nearly 50%. The underlying Nasdaq Q-50 index moved comparatively little over that period. The divergence highlights a structural problem in India’s overseas ETF market.
Why Foreign ETF Prices Are Diverging From NAV
An ETF trades on the exchange like any listed share. Its market price reflects whatever buyers and sellers agree. NAV, however, reflects the value of its underlying portfolio. Normally, creation and redemption keep these two figures close. When demand pushes prices above NAV, new units can be created. That added supply typically narrows the gap. The reverse can occur when selling pressure mounts.
Overseas Investment Ceiling Restricts ETF Supply
Indian mutual funds have reached limits on overseas investment. Funds affected cannot freely create new units for such ETFs. This weakens the mechanism linking market prices to NAV. Strong demand then has nowhere to go but into price. That constraint, not fraud or mismanagement, drives much of this gap.
Sebi’s Price-Band Rule Changes the Dynamic
ETFs also operate within daily price bands. Until 4 September, that band referenced a two-day-old NAV. Under Sebi’s new rule, effective from 7 September, this changed. The band now references the previous day’s closing market price. The upper limit can extend 20% above that reference. An existing premium can therefore shape the next day’s range. Combined with restricted unit creation, this can widen premiums further.
₹213 ETF Price Versus ₹117 NAV
A buyer paying ₹213 gains real exposure worth ₹117. The remaining ₹96 reflects the premium embedded in that price. This amount is not automatically lost while a premium persists. The risk emerges only if that premium later contracts.
How Investors Can Lose Despite Nasdaq Gains
Consider the underlying index rising 40% over two years. An investor could still lose money on the ETF. That happens if the premium shrinks back towards zero. Returns on such ETFs depend on two separate forces. One is the underlying index; the other is the premium itself.
Premiums Have Happened Before
Such distortions are not new to Indian markets. In 1992, SBI Magnum Multiplier, a closed-end fund, saw similar gaps. Its NAV was ₹20, yet units traded near ₹100. That fund could not issue new units either. The mechanism differed, but the underlying effect was comparable.
Price Is Not the Same as Value
The core lesson concerns price versus intrinsic value. A rising ETF price does not always mean rising portfolio value. Foreign investment limits and Sebi’s revised band have combined here. Together, they have weakened the checks that normally align the two. Investors buying at current levels should understand that gap clearly.
