There is a peculiar psychology to scarcity. When something desirable suddenly becomes difficult to access, we tend to value it more. If that same thing has also performed exceptionally well recently, and everyone around us appears to be rushing toward it, the pressure to act becomes even stronger. Individually, none of these factors is necessarily problematic. Together, however, they can create a powerful behavioural trap: the fear that if we do not invest now, we will permanently miss the opportunity.

 

That is precisely the situation many Indian investors are confronting with international investing. Global diversification has become increasingly attractive, but access to some overseas investment routes has become constrained. At the same time, recent international market performance has been strong, particularly in segments such as US equities. The result is an uncomfortable combination: limited access, attractive past returns and rising investor urgency.

 

Before committing fresh capital, it is worth slowing down and separating these three things.

 

India's mutual-fund industry has operated within an overseas-securities investment ceiling of roughly US$7 billion, even as investor appetite for global diversification has grown. By 2026, the mismatch between demand and available headroom had become visible, with several international schemes restricting or pausing fresh inflows after reaching the capacity permitted for overseas investments. The scarcity is therefore real. But scarcity and value are not the same thing. When something becomes difficult to buy, our instinct is to assume that it has become more desirable. The investment itself, however, may not have changed at all. A regulatory ceiling can make access scarce without making the underlying asset more attractive. This distinction becomes particularly important when the asset has also delivered strong recent returns.

 

Scarcity and strong recent performance create a third ingredient: the fear of missing out. FOMO rarely sounds like a carefully constructed investment thesis. It sounds more like:

 

"Everyone else is getting in. If I don't act now, I may never get another chance."

 

A restricted subscription window intensifies precisely this response. The shorter the window appears, the greater the temptation to replace analysis with urgency. But FOMO is not a valuation model. It cannot tell us whether an asset is cheap or expensive. It cannot tell us whether the exposure is already adequately represented in the portfolio. It cannot tell us whether another investment vehicle offers the same exposure more efficiently. It tells us only that other people are moving—and that we are worried about being left behind.

 

Imagine two investors, Aman and Rohan. Both want exposure to the S&P 500. After a year, Aman looks at his ETF and sees a 16% return, while Rohan looks at the S&P 500 and sees a 12% return. Aman might conclude that his ETF manager has generated 4% alpha. But that conclusion is premature. The question is: what exactly explains the difference?

 

The return you see may not be the return the asset generated. When an Indian investor buys an unhedged international equity fund, the investment effectively contains two exposures:

 

foreign equity + foreign currency.

 

Consider a simple example. Suppose the S&P 500 rises 10% while the US dollar appreciates 5% against the rupee. The approximate rupee return is: (1.10 × 1.05) − 1 = 15.5%

 

The investor therefore sees a return of about 15.5%, compared with the S&P 500's 10% return in dollar terms. It may be tempting to conclude that the ETF has generated 5.5% of excess performance. It has not. A substantial part of the difference has come from currency appreciation. This is one of the defining features of international investing. Currency can amplify an equity return, or reduce it. A period of rupee depreciation can make overseas investments look spectacular in domestic-currency terms, while a strengthening rupee can work in the opposite direction. This becomes particularly important when investors are already influenced by FOMO. A strong rupee return can reinforce the belief that the underlying international asset is unusually attractive, even when part of the performance is simply a currency effect.

 

The sensible approach is therefore to separate two questions:

 

How attractive is the underlying foreign market?

 

and

 

How comfortable am I with the currency exposure that comes with it?

 

An investor comfortable with US equity risk is not automatically comfortable with rupee-dollar volatility.

 

Interestingly, this phenomenon is not unique to India. China's Qualified Domestic Institutional Investor, or QDII, framework provides a useful parallel. In June 2026, 51 of 344 QDII funds had reportedly suspended subscriptions, while another 119 had imposed purchase limits because overseas-investment quotas had become scarce relative to demand. China subsequently expanded its QDII quota to approximately US$176.2 billion and indicated that further increases could follow. The lesson is important. When a large domestic pool of savings encounters a capped channel to international assets, scarcity can emerge quickly. But scarcity is often a capacity problem, not evidence that the underlying investment opportunity has suddenly become more valuable. Regulatory capacity can change. Investment fundamentals can change. Neither should be confused with the other.

 

There is another issue that is easy to overlook when buying international ETFs: markets do not operate on the same clock. An ETF available to an Indian investor may hold securities listed in Japan, Europe or the United States. The ETF itself may be trading while the underlying market is closed. Imagine an ETF holding Japanese equities. Tokyo has already closed for the day when important news emerges in the United States, perhaps an inflation number, a sharp move in oil prices or a geopolitical development. The ETF can respond to that information because it is still trading. The underlying Japanese securities cannot. Their latest observable prices remain yesterday's closing prices until Tokyo reopens. This can cause the ETF's market price to move away from the latest reported net asset value. That does not necessarily indicate a problem with the ETF. It is a natural consequence of non-overlapping trading hours and delayed price discovery. Under normal circumstances, such differences may be relatively modest. But when investors are rushing into a scarce investment opportunity, the distinction becomes more important. The investor may believe that they are buying an asset at its fair underlying value when, in reality, the ETF market price is incorporating information that the reported NAV does not yet reflect. This is one reason why international ETF investing requires investors to look beyond the headline return.

 

There is another price investors can pay: the difference between an ETF's market price and its NAV. Suppose the underlying securities are worth ₹100 per ETF unit. If enthusiasm pushes the ETF's market price to ₹105, the ETF is trading at a 5% premium to NAV. In such a situation, you pay a premium simply for access. Now suppose the underlying portfolio subsequently rises 10%. Its NAV becomes ₹110. But imagine that investor enthusiasm fades and the premium contracts from 5% to 1%. The ETF would then trade at approximately ₹111.10. The underlying portfolio has risen 10%. The investor who bought at ₹105 has earned only about 5.8%. The investor was right about the asset, however wrong about the price paid to access the asset. This is a crucial distinction. The return generated by the underlying portfolio and the return earned by the investor are not always identical. Market price, NAV, liquidity, transaction costs and the timing of the trade can all influence the outcome. This risk becomes more relevant when the underlying market is closed, illiquid or operating in a different time zone.

 

Passive investing was designed to simplify investing. Instead of trying to predict which individual stock will outperform, the investor chooses an index. But international ETF investing introduces another question: How efficiently does the investment vehicle actually deliver the index? That requires attention to: replication methodology; tracking difference; tracking error; currency exposure; taxation; liquidity; bid-ask spreads; NAV; premiums and discounts; and transaction costs. There is an irony here. The more passive the investment strategy, the more important implementation quality can become. The investor has deliberately chosen not to make an active stock-selection decision. But the investor is still making an active decision about how to access the market.

 

My dear readers, remember, when evaluating an international ETF, ask these six questions.

 

 

 

International diversification is more than moving money geographically

 

It is tempting to think of diversification simply as: India → US. But cross-border investing involves much more than geography. An investor may simultaneously be crossing: markets + currencies + tax systems + trading hours + regulations + custody arrangements + investment vehicles. Every additional layer creates another potential source of friction.

 

None of this means that international diversification is a mistake. Nor does it mean that a constrained investment route should automatically be avoided. It simply means that scarcity should not determine the investment decision. A useful discipline is to ask:

 

Don't fall in love with the number

 

If an international ETF beats its benchmark by 2%, do not immediately celebrate. Investigate. If it underperforms by 2%, do not immediately reject it. Investigate. If it suddenly becomes difficult to access, do not assume it has become more valuable. Investigate. 

 

Because sometimes the biggest risk in international investing is not missing the opportunity. It is paying too much simply because everyone is afraid of missing it.

 

Don’t mistake scarcity for value!

 

Author

 

 Dr. Tarunika Jain Agrawal Ph.D. 

 Dr. Mukesh Jindal | Partner