Indian ETFs that track US or global indices trade at a premium because Indian mutual funds have run out of room to invest abroad. The industry can hold only $7 billion overseas, with $1 billion for overseas ETFs. Once a fund house hits its share, it stops creating new ETF units, so buyers bid up the units that already exist. The premium is money you lose if it shrinks, even when the index does not fall.
Table of contents
- What is an ETF premium?
- Why do Indian international ETFs trade at a premium?
- Do international FoFs trade at a premium too?
- What does the premium cost you?
- What can you buy instead?
What is an ETF premium?
An ETF has two prices. Its net asset value (NAV) is what its holdings are worth per unit. Its market price is what buyers pay for a unit on the exchange. When the market price is above the NAV, the ETF trades at a premium.
During market hours, fund houses publish an indicative NAV (iNAV), a live estimate of what each unit is worth. You can find it on the fund house's website and on the exchange's ETF page.
Example. Suppose an Indian Nasdaq 100 ETF shows an iNAV of ₹100 and trades at ₹112. It is at a 12% premium: you pay ₹112 for ₹100 of Nasdaq 100 shares.
For most domestic ETFs, the gap stays small, usually well under 1%, because market makers can create new units at NAV whenever the price runs ahead. For international ETFs in India, that check has stopped working.
Why do Indian international ETFs trade at a premium?
Three things stack up.
1. Indian mutual funds have a fixed limit for investing abroad
The RBI set the mutual fund industry's overseas investment limit at $7 billion in 2008, alongside a separate $1 billion for investing in overseas ETFs (RBI circular). SEBI splits that room between fund houses: since its circular of 3 June 2021 (SEBI/HO/IMD/IMD-II/DOF3/P/CIR/2021/571), each fund house can invest up to $1 billion abroad within the $7 billion, and up to $300 million in overseas ETFs within the $1 billion.
These limits cover the whole industry together, and they have not been raised since 2008, even as Indian demand for US and global funds has grown many times over.
2. The limit was reached in 2022
The industry hit the $7 billion ceiling in early 2022, and fund houses stopped taking fresh money into international schemes from 1 February 2022 (Motilal Oswal notice). SEBI later let fund houses invest again, but only within the room each had at the start of February 2022. Since then, international schemes open and close as room frees up from redemptions and closes again as new money comes in. The separate pool for overseas ETFs has also been used up.
3. New ETF units stop being created
An ETF's price normally stays close to its NAV because large market participants can create new units from the fund house when the price runs above NAV, and redeem units when it falls below. When a fund house has no room left to buy shares abroad, it suspends the creation of new units. Motilal Oswal, for example, suspended creation of units in its Nasdaq 100 ETF and Nasdaq Q 50 ETF directly with the fund (Motilal Oswal notice).
With no new units, the number of units is fixed. Demand from Indian investors who want the Nasdaq 100 or S&P 500 meets a fixed supply, and the price rises above NAV. The check only works one way now: if the price falls below NAV, units can still be redeemed, but if it rises above NAV, nobody can create new units to pull it back.
Note: The premium is not set by the fund house and is not a fee. It is what buyers on the exchange are willing to pay, and it can change quickly in either direction.
Do international FoFs trade at a premium too?
No. A fund of funds (FoF) is not traded on an exchange. You buy and sell units with the fund house at NAV, so there is no market price to drift above it.
The FoF problem is different: when its fund house has no room under the overseas limit, it stops taking new money. Depending on the fund, that means no lump sums, no new SIPs, or paused SIPs that may later be cancelled. So with an FoF you never overpay, but you often cannot buy at all.
For how specific FoFs compare with buying the same index directly, see Motilal Oswal Nasdaq 100 FoF vs UCITS ETF and Navi Nasdaq 100 FoF vs UCITS ETF.
What does the premium cost you?
The premium is not lost on the day you buy. It is lost when it shrinks, which can happen when fund houses get room to create units again, when the limit is raised, or simply when demand cools.
Example. Suppose you buy an Indian Nasdaq 100 ETF when its NAV is ₹100 and it trades at ₹115, a 15% premium. A year later the index is exactly where it was, so the NAV is still ₹100, but the premium has fallen to 2%.
| Item | Per unit |
|---|---|
| Price you paid | ₹115 |
| NAV when you bought | ₹100 |
| NAV a year later, index flat | ₹100 |
| Price a year later, at a 2% premium | ₹102 |
| Your loss | ₹13, or 11.3% |
The result: you lose 11.3% even though the Nasdaq 100 did not fall
The reverse can happen too. If the premium widens after you buy, you gain more than the index. But you are now betting on the premium as well as the index, and the premium can move much faster than the index itself.
Three checks before you buy an Indian international ETF:
- Compare the market price with the iNAV on the fund house's website at the time you place the order.
- Use a limit order at a price you are comfortable with, not a market order.
- Ask whether the premium is worth paying, given that the same index can usually be bought at NAV another way.
What can you buy instead?
If the aim is the same index exposure without paying a premium, there are three routes. Each buys at or close to the fund's NAV.
| Route | Price you pay | Can you buy it now? | What to know |
|---|---|---|---|
| An Indian international FoF that is open | NAV | Only while its fund house has room under the overseas limit | Can close to new money at short notice |
| A UCITS ETF or US ETF bought directly abroad under LRS | Close to NAV, because market makers can create units freely | Yes, within the LRS limit of $250,000 a year | Tax collected at source on larger remittances, Schedule FA every year, and foreign tax rules |
| A GIFT City fund | NAV | Depends on the fund | A separate route with its own structure and costs |
Buying directly abroad is the only route that is not limited by the mutual fund industry's overseas cap. A UCITS ETF such as an Irish-domiciled S&P 500 or Nasdaq 100 fund trades close to its NAV, because large market participants can create new units whenever demand rises. For how this compares fund by fund, see Motilal Oswal S&P 500 vs UCITS ETF and Mirae Asset S&P 500 ETF vs FoF vs UCITS. For the GIFT City route, see UCITS ETFs vs GIFT City outbound funds.
What changes when you invest directly:
- LRS and TCS. You send money under the Liberalised Remittance Scheme, and tax is collected at source on investment remittances above a yearly threshold. That tax can be adjusted against your income tax. See LRS for investments and TCS on foreign investments.
- Reporting. Foreign holdings go in Schedule FA every year you are resident and ordinarily resident. See the Schedule FA guide.
- Fund choice. An Irish UCITS ETF avoids US estate tax and pays 15% US tax on dividends inside the fund. See why most UCITS ETFs are domiciled in Ireland.
Note: Reports in October 2026 said the RBI has proposed taking investment remittances out of the automatic LRS route. Nothing has changed yet: there is no circular or effective date. See is the RBI cutting the LRS limit to zero?
About Paasa
Paasa is a global investing platform built for Indian and Asian investors. It gives anyone direct access to stocks, ETFs and UCITS funds on their home exchanges across the US, Canada, the UK, Germany, France, Switzerland, the Netherlands, South Korea, Japan, Hong Kong and Singapore.
- The same indices without the premium: buy UCITS ETFs and US ETFs that track the S&P 500, Nasdaq 100 and world indices directly, at prices close to their NAV.
- UCITS ETFs and UCITS mutual funds in any trading currency: choose the USD, GBP or EUR line that suits you.
- A dedicated relationship manager: help with LRS remittances, TCS and the reporting that comes with holding funds abroad.
