In today’s world, where gaining access to global investment products and services is at one’s fingertips, it is common for Indian investors to eye the world’s largest and most innovative US companies while shaping their financial portfolios.
The success of companies like Apple, Amazon, Met, and Google over the decades has inspired immense trust in investors across the globe. However, as easy as it may sound, complexities like international brokerage accounts and currency exchange rates have made it challenging for Indian investors to invest directly in US stocks.
But don’t let your investment spirit shrink this festive season – Indian mutual funds investing in US stocks make it easier for you to gain exposure to US stocks without the hassle of managing overseas transactions.
This article serves as a guide to those interested in investing in US stocks. It explains with clarity how Indian mutual funds investing in US stocks work, their benefits, risks, taxation, and who can consider investing in such investment vehicles.
Ways to invest in US stocks for Indian MF investors
Indian MF investors can invest in US stocks through mutual funds that focus on international markets, typically fund of funds (FoFs).
To explain further, an international mutual fund is a type of investment scheme that primarily allocates its assets to equity or equity-linked instruments of companies listed on foreign stock exchanges.
Furthermore, these funds may include investments in debt securities, offering a diversified portfolio. By leveraging these mutual funds, investors can gain exposure to the US market without directly purchasing individual stocks.
Points to note on US-focused international MFs
Expense ratios
International mutual funds generally have higher expense ratios compared to Indian mutual funds. These additional costs include management fees, administrative charges, and currency conversion fees, which can reduce the overall returns for investors.
Regulatory limits
Indian Asset Management Companies (AMCs) have restrictions on how much they can invest in international markets. The Reserve Bank of India (RBI) imposes an overall cap on foreign investments, which can limit the ability of fund managers to diversify into global markets.
Market cycles
The stock market cycles in the US are different from those in India and this can affect the performance of international funds. Investors may experience returns that don’t align with their expectations based on Indian market trends.
Types of mutual funds for US stocks and how they work
Investors in India can gain exposure to US stocks through different mutual funds. Every option works differently in terms of its structure, taxation rules and investment process.
One way to do it is through a Fund of Fund (FoF) investing in US-based mutual fund/s or ETFs. When you invest in an international or global FoF, your money is pooled with that of other investors and invested in international funds that track US indices such as the S&P or Nasdaq. Returns depend on the performance of the overseas fund and the impact of currency fluctuations.
Another way is through direct international mutual funds. Some Indian fund houses offer schemes that invest directly in US-listed equities. These funds can provide targeted exposure to a plethora of companies and sectors.
US-focused Exchange Traded Funds or ETFs listed in India track indices like the Nasdaq 100 or S&P 500. They trade like shares on stock exchanges, giving investors flexibility and real-time pricing.
Finally, thematic or sectoral funds focus on specific themes such as global technology, innovation, or consumption trends. While they provide exposure to niche international sectors, they also carry higher risk due to concentration. Overall, these mutual funds allow Indian investors to diversify globally and potentially benefit from the growth of leading US companies.
Who should invest in international mutual funds?
While any investor aspiring to invest in US stocks can invest in international mutual funds, it is said that investing in these funds is most suitable for the following investors:
Diversification seekers
Investors who want to diversify their investment portfolio across geographies can opt for these funds. These funds help reduce reliance on Indian markets by exposing investors to global markets.
Long-term investors
To capitalise on the successful journey of the US companies, a vision to stay invested for a longer period is advisable. Any investor with a horizon of 5-7 years or more can benefit from potential growth in international markets.
Dollar income aspirants
Individuals looking to hedge against rupee depreciation or planning for expenses in dollars can consider these funds.
Risk-tolerant investors
Risk assessment is one of the important considerations of any investment. International mutual funds also carry potential risks such as market and currency risks. Hence, they are better suited for those who can handle volatility.
Let’s discuss the risks further.
What are the risks of investing in international mutual funds?
Market risk
The returns from US-focused funds depend largely on how well the US market performs. Moreover, global economic events can influence these returns.
Currency risk
If the Indian rupee strengthens against the US dollar, the value of your investments in US funds could decrease, lowering your overall returns.
Geopolitical risks
Changes in political or economic policies in the US can impact the stability and growth of its stock market, which may affect your investments.
Higher costs
International mutual funds often have higher management fees compared to domestic funds. These additional costs can impact net returns.
Tax complexity
The taxation rules for international funds are different from those for Indian equity funds, which could make tax planning more complicated and affect your profits.
What are the tax implications of international MFs?
Under the latest taxation rules, gains from international Fund of Funds are categorised as Long Term Capital Gains (LTCG) if the investment is held for over 24 months. Also, gains from international ETFs are categorised as LTCG if the units are held for over 12 months.
- LTCG – Taxed at 12.5% beyond the annual Rs. 1.25-lakh exemption limit.
- STCG – Taxed at the investor’s applicable slab rate
It is always advisable to consult a tax advisor to understand the implications fully before investing in International mutual funds.
Conclusion
Mutual fund investing in US stocks offers Indian investors a seamless way to gain exposure to some of the world’s largest and most innovative companies. By investing through international mutual funds, investors can diversify their portfolios and potentially benefit from the growth of the US economy. However, it is crucial to consider the associated risks, costs, and tax implications before investing. Choose funds that align with your financial goals, risk tolerance, and investment horizon. Remember, while international mutual funds can enhance the return potential, they also come with their share of complexities. Careful planning and regular review of your investments can help you make the most of this opportunity.
FAQs:
Can Indian mutual funds invest in stocks listed on the U.S. stock market?
Yes, Indian mutual funds can invest in US stocks either directly or indirectly. They achieve this through international mutual funds or funds of funds (FoFs) that allocate money to US equities or ETFs tracking US indices.
Can I invest in U.S. mutual funds via a Systematic Investment Plan (SIP)?
Yes, you can invest in international mutual funds that focus on US stocks through a SIP. This method allows you to invest systematically, spreading the risk over time and leveraging the power of compounding.
What is a Fund of Funds (FoF) investing in US stocks?
A type of mutual fund, Fund of Funds or FoFs invest in international funds or ETFs, which in turn hold US stocks. Instead of directly buying shares of US companies, investors pool money into an FoF that provides exposure to indices like the S&P 500 or Nasdaq. This makes it easier for Indian investors to access US markets without opening overseas accounts.
How can I track the performance of my US stock mutual funds?
To track the performance of any US stock mutual fund, you can visit the respective AMC website or mutual fund tracking apps. The key metrics to review here are NAV, past returns, benchmark comparisons and fund fact sheets. Many platforms also provide currency-adjusted performance, which is crucial for international funds. Past performance may or may not be sustained in future.
Are there any currency risks while investing in US mutual funds?
Yes, there can be potential fluctuations in returns of US mutual funds due to changes in INR-USD exchange rates. Investors should account for this additional layer of risk.
What are the charges and expense ratios for international mutual funds?
International mutual funds, especially FoFs, usually have a higher expense ratio when compared to domestic funds. This is because they include both expenses of the Indian fund and the underlying foreign fund. The charges can, however, vary across schemes, so it’s important to review the Scheme Information Document (SID) before investing.
Can NRI investors invest in US stock mutual funds from India?
Yes, NRIs can invest in US-focused mutual funds that are offered in India, but this is subject to FEMA regulations and KYC compliance. However, NRIs should check the tax implications in both India and their country of residence.
How long should I stay invested in international mutual funds for optimal returns?
No strategy or horizon can guarantee returns. However, a relatively long investment horizon (such as five years or more) is usually recommended for equity funds. This allows investors to potentially mitigate the impact of volatility and currency fluctuations.
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.
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