As SEBI curtails inflows, overseas ETFs’ price, NAV see huge spread
MISMATCH. MFs are unable to create fresh units; market price is driven completely by demand and supply
The overseas-focused exchange traded funds (ETFs) on stock exchanges are trading at a premium over the indicative net asset value (iNAV) announced by mutual funds due to soaring investors amid the SEBI diktat.
Last month, SEBI directed AMFI to stop fund houses from accepting fresh inflows into ETFs investing in overseas ETFs from April 1. The direction was on the back of strong inflows taking overseas ETFs close to the mandated investment limit of $1 billion.
On Friday, Mirae Asset NYSE FANG+ ETF closed at a premium at ₹95 on the BSE against the iNAV of ₹79. Similarly, Nippon India ETF Hang Seng BeES was traded at ₹267 against iNAV of ₹255.
ILLIQUID SMALL-CAPS
Usually, mutual funds generate units based on market makers’ investment to ensure that the deviation in stock market price of ETFs and iNAV are bare minimal. However, with SEBI stopping overseas investment, mutual funds are not able to create fresh units and the market maker leg in the entire operation is completely cut o. The iNAV announced by MFs are based on the investments already made in overseas ETFs and stocks.
With this, most of the overseas ETFs are traded like an illiquid small-cap stock and prices shoot up depending on demand and supply, said an executive of a MF house.
$7B LIMIT
Since SEBI has also stopped fresh investment in MF schemes investing directly in global markets, there is a big demand for ETFs traded on the exchange. MF schemes investing directly in overseas markets have a limit of $7 billion.
Arun Sundaresan, Head ETF, Nippon Life India Asset Management, said foreign investments are currently not allowed in MFs as the industry has exhausted overall investment limits. Hence, the demand-supply on the exchange for a particular foreign ETF is driving the premium and discount, which may be dierent from the iNAV of the fund, he added.
Pratik Oswal, Head of Passive Funds, Motilal Oswal AMC, said Motilal Oswal Nasdaq 100 ETF & FoF and S&P500 Index Fund continue to invest internationally and supply fresh units daily, as the fund house has headroom available for international securities.
Zerodha, one of the largest stock broking firms, said several ETFs investing in international securities are trading at a premium compared with their iNAV because of restrictions on international investments by MFs.