The Indian mutual fund industry has a $7 billion limit for overseas investments. Around Jan-Feb of this year, mutual funds started hitting that limit. So pretty much all the international mutual funds have stopped fresh inflows. International ETFs had to suspend fresh creations and redemptions, and this is where the problem lies.
In simple terms, an ETF is like a mutual fund that trades on the exchange. Meaning, that it will have an NAV like a mutual fund, which is the fair value of all the underlying assets. An ETF also has a price which is determined by demand and supply on the exchanges. So, ETFs can trade at a premium or discount to their fair value, which is measured by NAV or intraday NAV (iNAV). Unlike a mutual fund, ETFs also appoint market makers and authorized participants. Their job is to provide liquidity and also to ensure that the ETF price is not too far away from its fair value.
Now, let’s look at a live example. The current price of Motilal Oswal Nasdaq 100 ETF is around 99, but the intraday NAV or iNAV is about 87. Meaning, Motilal Oswal Nasdaq 100 ETF is trading at a premium of 12%.
Now, typically, the market makers will buy all the underlying shares of the Nasdaq 100 index and deliver them to Motilal Oswal AMC. Motilal takes the shares and creates units for the market maker. The market maker would then go and sell the units on the exchange at the current price, and the difference minus his costs will be the profit. Similarly, if the ETF is trading at a discount, the process will the opposite. This creation and redemption mechanism keeps the ETF prices in line with their NAV.
But the problem is, since the AMCs are hitting the limit set by RBI, creations and redemptions have been suspended in international ETF. So only the existing units that were already created are trading on the exchanges. Without active market-making (creations/redemptions) international ETF prices are trading at premiums and discounts.
So, if you are buying or selling international ETFs, please ensure that you are checking the iNAV on the AMC websites. The other important thing is, the iNAVs shown on the AMC websites may be incorrect because the website might be down😅 I know, this is the reality and I hope it changes. But anyways, don’t just blindly buy these ETFs because international markets are falling.
We’ve also added a nudge on Kite
We also have a detailed chapter on ETFs on Varsity if you help you understand how ETFs work.
There are some international mutual funds which are still accepting inflows.
DSP Global Innovation Fund of Fund. This fund was supposed to invest in multiple international ETFs but is currently only investing in Nasdaq 100 ETF. It will invest in the other ETFs, once the restrictions are revised. So this is not a pure Nasdaq fund. Check the presentation for more.
Navi US Total Stock Market Fund of Fund
**Please check the scheme details and see if they fit your investment objective. Invest only if it does. Don’t just invest haphazardly. **