Global ETF craze has retail buyers paying steep premiums

In recent months, Indian retail investors have increasingly turned to international exchange-traded funds (ETFs), attracted by their impressive returns compared to local equity markets. However, many are purchasing these ETFs at significant premiums—ranging from 18% to as high as 25% above their net asset values (NAV)—which poses risks in the event of market corrections. The surge in demand for these funds has been exacerbated by the Reserve Bank of India's (RBI) restrictions on the amount of money mutual funds can invest overseas, currently capped at $7 billion for international mutual fund schemes and an additional $1 billion for ETFs. This limit has led to a situation where many ETFs cannot accept new investments, forcing investors to buy existing units in the secondary market at inflated prices. Experts caution that such premium purchases could lead to substantial losses if the RBI were to lift these restrictions, potentially causing the premium to diminish rapidly. As the market for overseas ETFs continues to grow, investors are advised to exercise caution and consider the implications of the current investment landscape, especially with high premiums and regulatory constraints in play.