How Nvidia stock crash will impact Indian investors’ US mutual fund and ETF holdings

Nvidia’s sharp stock decline has raised concerns among Indian investors holding mutual funds that invest in US equities. However, the impact on most diversified international funds has been relatively limited, with losses ranging between 1% and 3.2%, despite the chipmaker’s shares falling 13% in a week.

The bigger risk for Indian investors may lie elsewhere, as some US-focused exchange-traded funds (ETFs) are trading at substantial premiums to the value of their underlying holdings. This exposes buyers to potential losses even if the stocks themselves remain unchanged.

Nvidia shares fell 13% in the week ended November 11. The stock declined another 4.3% the following day after its board opened an inquiry into chief executive Jensen Huang, who subsequently resigned.

For Indian investors, the correction highlights two distinct risks. These include the concentration of individual stocks in mutual fund portfolios and the premiums investors pay when buying overseas ETFs on Indian exchanges.

How much have Indian mutual funds lost after Nvidia’s fall?

According to Value Research, most Indian mutual funds investing in US equities lost between 1% and 3.2% during the week ended November 11, considerably less than Nvidia’s 13% decline. Three funds even reported positive returns. Mirae Asset NYSE FANG+ ETF FoF gained 7.9%, Motilal Oswal Nasdaq 100 FoF rose 4% and Mirae Asset S&P 500 Top 50 ETF FoF gained 3.2%.

The difference largely comes down to diversification and how much exposure a fund has to Nvidia.

Seven of India’s 60 international funds track the Nasdaq 100, making it the most widely tracked overseas index among these schemes. Nvidia accounts for approximately 8% of the index. Therefore, a 13% decline in the stock would translate into an estimated 1% impact on the index, assuming other constituents remain unchanged.

The impact was higher in more concentrated indices. Nvidia accounts for around 10% of the NYSE FANG+ index, which holds just 10 companies, and approximately 12% of the S&P 500 Top 50 index.

Some domestic equity schemes also have direct exposure to Nvidia. Of 14 Indian schemes reviewed by Value Research in October, five held the US stock. Edelweiss Technology Fund had the highest exposure at 4.7% of its portfolio. DSP Multi Asset Allocation, Axis Innovation, Franklin India Technology and DSP Value held between 0.9% and 1.4%.

For funds with relatively small exposure, the direct impact of Nvidia’s correction was limited. For instance, a 13% fall in a stock accounting for 1% of a fund’s portfolio would reduce its value by approximately 0.13%, assuming other holdings remain unchanged.

Why are Indian ETF investors facing a bigger risk?

While mutual fund diversification has cushioned the impact of Nvidia’s fall, investors buying US-focused ETFs face another concern. This is the difference between an ETF’s market price and its net asset value (NAV).

ETFs trade on stock exchanges like shares. Their market prices can therefore move away from the underlying value of the securities they hold. When an ETF trades at a premium, investors pay more than the actual value of its underlying assets.

According to Value Research, the Mirae Asset NYSE FANG+ ETF’s underlying holdings lost 2.2% during the week ended November 11, but its market price rose 7.9%. Investors were paying ₹148 for every ₹100 worth of underlying shares, up from ₹135 a week earlier.

The premium was even higher for the Motilal Oswal Nasdaq Q50 ETF. Despite having no direct exposure to Nvidia, it traded at approximately ₹201 for every ₹100 worth of underlying assets.

Other US-focused ETFs also traded at substantial premiums.

The premiums are also significantly above their respective one-year averages. For instance, the FANG+ ETF’s premium of 48.4% compares with its one-year average of 23.8%.

This creates a separate risk for investors. If the FANG+ ETF’s premium returns to its historical average, its market price could fall by approximately 17%, even if the underlying shares do not decline further.

Should investors exit their US mutual funds and ETFs?

Nvidia’s correction alone may not be a reason to stop systematic investment plans (SIPs) in diversified US mutual funds. Investors should instead assess their funds’ exposure to the stock, portfolio concentration and overlap with other schemes.

However, those considering fresh investments through ETFs should check the market price against the NAV before buying. A steep premium can expose investors to losses even when the underlying stocks remain stable.

Ultimately, Nvidia’s correction highlights two different risks for Indian investors. While diversification can limit the impact of an individual stock’s decline, paying an excessive premium for an ETF can magnify losses even without a further fall in the underlying market.