Mumbai: Motilal Oswal Nasdaq Q50 ETF, which invests ₹176 crore of investor money in the 50 largest non-financial companies outside the Nasdaq 100, tumbled 20% on Wednesday - the lowest tradable limit of the day. The ETF had also fallen 20% in each of the previous two sessions, taking its cumulative decline over three trading sessions to nearly 49%.

The sharp reversal serves as a warning to investors who have been piling into some international ETFs listed on domestic exchanges to ride the recent rally, even as their market prices have moved sharply above the value of their underlying assets.

The Nasdaq Q50 ETF's market price had surged from ₹141.93 on September 4 to ₹396.30 on September 18, a gain of 179% in two weeks. On September 21, it climbed as high as ₹471.99 before ending at ₹317.04. It fell another 20% to ₹253.64 on September 22 and extended the decline by another 20% on Wednesday.

ET Bureau

"There are crazy volumes in a fund with assets of just ₹172 crore, with the price way above the indicative NAV on the exchange. Seems like deliberate manipulation and then unwinding," said Amit Sahita, founder, Fincode.

Several international ETFs are trading at sizeable premiums to their net asset values (NAVs).

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Even after the latest slump, Motilal Oswal Nasdaq Q50 ETF on Wednesday traded 67% premium to the NAV. Other international ETFs such as Motilal Oswal Nasdaq 100, Mirae Asset NYSE FANG+, Mirae Asset S&P 500 Top 50 ETF and Mirae Asset Hang Seng TECH ETF are at trading 14-40% above their NAVs.

The rush for these ETFs has been fuelled by strong returns from the US and other overseas markets and the underperformance of Indian equities, prompting investors to consider markets overseas. Mutual funds have been unable to freely deploy fresh money in overseas stocks and assets because of the RBI-mandated industry investment limits, while the limited supply of international ETF units has not kept pace with demand. This has pushed their exchange-traded prices well above the value of their underlying portfolios.

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"RBI limits on overseas investments by Indian mutual funds have restricted fresh investment in international securities," said Motilal Oswal Mutual Fund in a note to clients. "This has limited the creation and availability of additional units of international ETFs, even when investor demand remains strong. As a result, a demand-supply imbalance may cause an international ETF to trade at a premium to its underlying value."

The mutual fund industry has already reached its $7-billion overseas investment limit, restricting fund houses from making fresh investments in international securities. While international ETFs continue to trade on domestic exchanges, the inability of fund houses to freely create additional units has constrained supply even as investor demand has remained strong.

Financial planners said investors should be cautious when buying international ETFs at large premiums to their net asset value.

"Buying at a premium to NAV will lead to a loss or eat into returns, as and when the US markets slow down or fresh limits open and the net asset value converges with market price," said Nikhil Gupta, Founder, Sage Capital.