Indian international ETFs are trading at premiums of up to 60% over their asset value because RBI limits prevent new units from being created. This creates a high risk for retail investors who may face losses if these premiums collapse. While the Liberalized Remittance Scheme offers a direct investment route, many investors remain trapped in these costly domestic funds due to the simplicity they offer.
Indian investors putting money into global exchange-traded funds (ETFs) are currently paying much more for their units than the actual value of the stocks held inside the funds. These funds, which track popular international markets such as the US Nasdaq, are trading at market prices far above their net asset value (NAV). In some cases, this premium has reached as high as 60%, meaning investors are effectively paying a significant markup just to gain exposure to foreign markets.
The root cause of this price distortion is a supply-demand mismatch driven by regulatory caps. The Reserve Bank of India (RBI) has set an overall limit of $1 billion for the mutual fund industry to invest in foreign assets, with a further cap of $300 million for individual asset management companies. Since these limits were hit in 2022 and 2024, fund houses are unable to issue fresh units to meet rising demand. Because supply is frozen, the buying pressure in the secondary market pushes prices well beyond the actual value of the underlying foreign shares.
This gap presents a real financial risk for retail portfolios. If an investor buys an ETF at a 50% premium, they are essentially paying ₹150 for assets worth only ₹100. If the market sentiment changes or liquidity dynamics shift, the premium can disappear rapidly. If the market price realigns with the underlying asset value, the investor could face a capital loss of roughly 33%, even if the actual foreign stocks held by the fund do not lose any value. This risk is often overlooked by investors who focus only on the performance of the underlying index.
Recent changes to the regulatory framework have also played a role in sustaining these gaps. The Securities and Exchange Board of India (SEBI) shifted its price-band framework, which governs how much a stock price can move in a single day. By using the previous day’s closing price rather than the NAV as the reference point, the current system allows market prices to climb higher without triggering volatility curbs. This effectively prevents the market price from being pulled back down toward the NAV by circuit breakers.
For retail investors, the alternative is using the Liberalized Remittance Scheme (LRS), which allows individuals to invest directly in international stocks. While this avoids the premium trap, it involves more complex paperwork, tax collected at source (TCS), and additional brokerage fees. Because of these frictions, many smaller investors continue to prefer the convenience of domestic ETFs. Investors may monitor the daily NAV updates provided by fund houses to understand the actual value of their holdings versus the market price at which they are buying.