Mumbai: Retail investors, drawn by the superior returns from international markets compared to local equities in the last year, are rushing to allocate money to mutual fund schemes that bet on overseas equities. Amid the dash to put money in these top performers, they are overlooking a crucial detail: many of these exchange-traded funds are at a 20-25% premium to their current values, leaving them exposed to any sharp reversals.

Currently, many of these schemes do not accept fresh subscriptions because they have hit the central bank’s overseas investing limit for mutual funds. The industry currently operates under a $7-billion limit for international mutual fund schemes and an additional $1-billion window for ETFs. The industry first hit this ceiling in February 2022, and since then, only schemes that haven’t exhausted their individual limits – or those where redemptions have freed up space – have been able to accept subscriptions. This resulted in a sharp spike in demand for ETFs, which are traded like stocks on exchanges – with investors buying them at premiums to their net asset values – the daily prices.

“Retail investors blindly buy ETFs, and there is no attempt to look at the premium or discount to the NAV,” says Chetan Nandani, founder, Prime Care Investments.

Currently, the Nippon India Hang Seng ETF trades at a 21% premium to its NAV, while the Mirae Asset Hang Seng Tech ETF trades at a premium of 23%. The Mirae Asset S&P 500 Top ETF trades at a premium of 18%, the Mirae Asset NYSE Fang+ ETF at 19%, while the Motilal Oswal Nasdaq 100 ETF trades at a premium of 2-3%.

“Overseas ETFs can no longer create new units to meet additional demand. However, since they trade on the exchanges, investors can still buy in the secondary markets,” says Kunal Valia, founder, Statlane – a Sebi-registered research analyst. “This has led to crowding into a handful of overseas ETFs, due to which these ETFs are trading at a premium way higher than the NAV.”

As per data from Value Research, international funds, on average, have returned 28% over the last year, compared with Nifty’s 12.8%.
RBI-imposed overseas limits have kept many US-focused mutual fund schemes shut for fresh subscriptions. While investors can bypass these curbs by using the Liberalised Remittance Scheme to buy ETFs abroad, the route comes with high transaction costs and the added hassle of separate brokerage accounts and compliance paperwork. Another alternative is to buy international funds set up in GIFT City, but the minimum investment of $5,000 makes it accessible only to larger-ticket investors. Investors who bought these international ETFs from the secondary market run the risk of sharp drawdowns if the RBI eventually decides to lift this limit. In such an instance, the lofty premiums on many of these products could evaporate quickly.

“Such investors carry a huge risk. The premium on these funds can disappear overnight if RBI were to increase or open up the limits,” warns Nandani. “If that happens, such investors could see a straight capital loss of 20-25% on these ETFs.”

ET Intelligence Group: A sharp fall in IDFC First Bank‘s stock price on Monday, following the discovery of a fraud at one of its branches, has significantly dented its valuation multiple. While the correction may tempt value-seeking investors, caution must be observed not to fall in a valuation trap. Past examples such as RBL Bank and IndusInd Bank where a financial institution faced similar situations show that the affected lenders struggled to claw back the lost ground and regain higher valuation multiples. In addition, such instances may also affect reputation and depositors’ trust.

In the case of IDFC First Bank, the price-book (P/B) multiple inched up gradually to nearly two over the past three years from around one, aided by improving asset quality. In addition, the mid-tier bank also took efforts to revive its net interest margin to around 6% from under 2% seven years ago by shifting its focus on consumer lending and reducing corporate exposure. This makeover has attracted value investors over the past few years, supporting the stock price. The stock hit a 52-week high of 87 in the first week of January and continued to trade closer to this level in subsequent weeks.

This however changed on Monday when the stock crashed by 16% to ’70 from the previous session’s close. Monday’s closing price was nearly 20% lower than the 52-week high level. The bank’s P/B has shrunk to 1.3, the lowest in over three years. However, investors need to wait before making fresh purchases as the stock is likely to remain under pressure given the possible impact of the latest fraud.

IDFC Bank informed stock exchanges on Saturday about fraudulent activities in accounts linked to the state government at its Chandigarh branch, amounting to ‘590 crore. The Haryana government has de-empanelled IDFC First Bank and AU Small Finance Bank from parking of bank deposits. Outflow of government funds may put pressure on current account- savings account (CASA) of banks at a time when they are still facing slower growth in deposits. Sector experts say, a part of government deposits may move to public sector undertaking banks over the medium term. BSE PSU Bank index rose 1.4% outperforming Sensex’s 0.6% rise on Monday.
“This episode could prompt other states to reassess their comfort with smaller banks,” a banking analyst told ET. “For mid-sized and smaller lenders, the risk of losing state government business has clearly risen after this incident.”

IDFC First Bank has said that recoveries will help cushion the financial impact of the fraud. Analysts, however, caution that recoveries in such cases are typically slow. “If any third party chooses to pursue litigation, the recovery process could be significantly delayed,” the analyst said.
As per the Reserve Bank of India’s circular ‘Provisioning pertaining to Fraud Accounts’, banks are required to provide for the entire amount involved in the fraud. This provisioning can be done immediately upon classification or spread over a period of upto four quarters. For IDFC Bank, if the entire amount is provided in a single quarter, the bank may be forced to report a net loss given that it reported a profit of ‘503 crore in the December quarter.

Asian shares fell at the open after fresh anxiety over the impact of artificial intelligence on company profits roiled Wall Street, while uncertainty over tariffs added to traders’ concerns.

The MSCI Asia Pacific Index edged down 0.2%, with shares in South Korea — a bellwether for AI investments — falling 0.5%. Attention later will turn to mainland China’s markets, which are set to reopen after the Lunar New Year holiday period.

The moves in Asia came after the S&P 500 Index slid 1%, with tech, delivery and payment shares hit as Citrini Research laid out the potential AI risks to various industries. International Business Machines Corp. tumbled 13% in its worst day since October 2000 as Anthropic said its Claude Code could help modernize COBOL, a programming language mainly run on IBM computers.

Amid lingering uncertainty over President Donald Trump’s tariffs, concerns about AI-driven disruption are prompting traders to dump shares of any company seen at the slightest risk of being displaced. Those worries have also grown despite solid results from megacaps amid doubts over whether big investments in the technology will pay off soon.

“The software selloff is a reminder of what can happen when momentum-driven sectors shift into reverse,” said Steve Sosnick at Interactive Brokers. “The broader, more important question is: How many sectors can go into reverse before they drag the broader market along with them?”

While software companies have been among the hardest hit, insurance brokers, private credit firms, cybersecurity and even real estate services stocks in the US have all been caught up in the so-called AI scare trade.
Asian shares have outperformed, with MSCI’s regional gauge rising 12% this year compared with a 0.1% decline in the S&P 500 over the same period. That marks the index’s strongest start to a year relative to the US benchmark on record.In other corners of the market, Treasuries and gold held their gains from the US session, when traders pared back risk and sought haven assets. Bitcoin continued to trade below $65,000. The dollar was little changed in early trading on Tuesday.

In other commodities, oil steadied as Trump said his preference was for a nuclear deal with Iran ahead of talks between the two nations this week.

Meanwhile, questions over US tariffs added to the downbeat mood on Monday.

After the Supreme Court’s decision Friday to nix Trump’s “reciprocal” tariffs, the White House announced plans to replace the prior levies with a new, across-the-board 15% tariff on US imports. The European Union froze ratification of its US trade deal amid the uncertainty.

The US is readying a spate of additional national security investigations that would enable Trump to impose new tariffs, as the administration seeks to rebuild his global tariff regime.

The administration is considering new national security tariffs on a half-dozen industries, the Wall Street Journal reported, citing people familiar with the plans.

“The push and pull with tariffs is likely to be a distracting theme for markets for the remainder of the year, albeit with less volatility than the initial shock last April,” said Michael Landsberg at Landsberg Bennett Private Wealth Management.

A new analysis finds prospective homebuyers have seen their purchasing power rise in the last year due to higher incomes and lower mortgage rates.

Zillow published a report on Monday that found a median-income U.S. household can now comfortably afford a $331,483 home with a 20% down payment. It found that the typical mortgage payment is 8.4% lower than it was a year ago when excluding taxes, insurance and assuming a 20% downpayment. 

Mortgage rates have fallen from an average of 6.96% in January 2025 to 6.1% last month, while incomes have ticked higher to give a median-income household an extra $30,302 in buying power compared with a year ago due to shifts in mortgage rates and household incomes.

“A more than $30,000 gain in buying power is meaningful for households that have been stretched thin by high rates. It can mean the difference between settling and choosing,” said Kara Ng, senior economist at Zillow.

RENT BECOMING MORE AFFORDABLE FOR MANY AMERICANS AS MARKET STABILIZES

“That doesn’t suddenly make this market affordable for everyone, but it does crack open doors that had firmly shut when rates peaked,” Ng added.

Zillow’s report noted that with the recent changes in household income and mortgage rates, the purchasing power of homebuyers is now at its highest level since March 2022, when mortgage rates were still below 5%.

The most recent low point for affordability was October 2023, when the median household could afford a $272,224 home as mortgage rates averaged 7.62% that month – the highest average for any month since 2000. 

OHIO GOVERNOR SAYS ENDING PROPERTY TAXES COULD PUSH STATE’S SALES TAX TO 20%

The latest dip in mortgage rates provided the biggest boost to homebuyers’ purchasing power in the nation’s most expensive housing markets.

Zillow noted that a median-income household in San Jose, Californina, has gained nearly $74,000 in buying power from a year ago – the largest gain among major metropolitan areas.

San Francisco buyers saw a boost of $56,115, and they were followed by peers in Washington, D.C. ($48,881), San Diego ($46,505) and Boston ($46,390). 

The number of homes that are affordable for a median-income household has also increased from a year ago by about 82,300 homes, Zillow found, with about 447,000 homes listed in January.

US HOME PRICES ARE RISING – BUT THESE FAST-GROWING MARKETS REMAIN AFFORDABLE

The 447,000 affordable home listings represent about 40.3% of total listings, an increase from 34.8% last year. 

Markets where home values have declined over the last year make even more homes available to median-income buyers, boosting purchasing power alongside the lower mortgage rates.

Houston led the country in the growth of affordable home inventory, with nearly 4,000 more homes listed for sale that are within reach for median-income buyers when compared with last year.

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Other metros with significant jumps in affordable home inventory are Phoenix with 3,434 more than last year, Dallas with 3,267, Miami with 2,981 and Atlanta’s gain of 2,279, Zillow found. Each of those markets has seen home values decline from last year.