The economic impact of Covid-19 has meant constant fluctuations in the Indian and global markets. At times, the markets trade at higher valuations and before investors know there are also sudden crashes. This causes a great amount of confusion among investors on how to protect their investment portfolios.
Since markets continue to remain unpredictable, experts suggest that now is the right time to gain exposure to foreign stocks like the US, especially for investors who want to manage risks through diversification. Market experts suggest investing in US stocks using Exchange-Traded Funds (ETFs) and Fund of Funds (FoF). So, how can you invest in US stocks via mutual funds?
Here is everything you need to know about investing in US stocks via mutual funds.
What are the mutual fund options to invest in US stocks?
There are presently three main options for exploring the US stock markets. These are:
Actively managed international mutual funds
International equity mutual funds that invest a portion of their total corpus in US equities while maintaining some portion focused on Indian equities can be an ideal choice for new investors who want to gain exposure to the US stock markets.
1. ETFs and FoFs
Apart from exposure to the US stock markets, Exchange-traded funds and Fund of Funds can provide diversification benefits to investors looking for portfolio stability. ETFs essentially track an underlying index, thereby providing a transparent and organized investment approach while providing exposure to foreign markets. Fund of funds essentially invests in other mutual funds and allows investors to gain exposure to a variety of investments with a limited investment amount.
Investors can invest in US stocks using ETFs or FoFs, as these are a cost-effective mode of gaining exposure to the US markets.
2. Index mutual funds – focused on US markets
These funds are passively managed and essentially track a chosen US-based stock index. The objective of these funds is to replicate the composition of the chosen index and match the returns generated by the index while charging low expense ratios.
What are the benefits of investing in US stocks?
Many investors ask why to invest in US stocks when you have so many Indian stocks offering high growth. Here are some benefits of investing in US stocks:
By investing in US stocks, an investor can diversify & broaden the overall investment portfolio exposure across the US economy. This can help in mitigating any India-specific economic risks.
Benefit of dollar appreciation
Back in 2011, the USD-INR exchange rate stood at about Rs. 47. Today, it is around Rs. 74. This indicates that an investor exposed to the US stock markets could have earned 36% by simply tapping on the currency appreciation. This benefit is apart from the gains that can be made from the US stock markets.
Higher returns through international exposure
The trends in US markets have reflected comparatively lower volatility vis-à-vis Indian stock markets. The former have also provided higher returns when looked at on a currency adjusted basis.
Exposure to companies with higher growth potential
It is because of reasons like technological innovations, pharmaceutical advancements, and industrial expansion that the US market is considered being at the forefront in comparison to other international markets. Thus, with an investment in US stocks, an Indian investor can benefit from gains through many innovation-oriented and high-potential companies.
Who should invest in US stocks through mutual funds?
Investing in US stocks through mutual funds may be best suited to investors who:
- Are seeking to attain diversification by widening their portfolio’s geographical exposure
- Want to gain international stock market exposure but at lower risk levels
- Seeking higher gains beyond what domestic markets could provide
- Have a higher risk appetite and longer investment horizon
While mutual funds can help in containing the overall risk levels that may arise with US stock market exposure, investors must bear in mind that every equity investment comes with risk of loss.
Factors to consider while investing in international mutual funds
Investors must make a note of the following risks and taxation aspects associated with international mutual fund investments:
- Every international fund has some common risks that investors must be prepared to take on while investing in these to gain exposure to US stocks. These are:
- Exchange rate risk
- Foreign market risk
- Concentration risk
- Investors must also bear in mind that any returns from international fund investments attract taxes in India. Some points to note here are:
- Any dividends more than Rs. 5,000 from these funds attract TDS at 7.5% for resident investors.
- Long-term capital gains tax at 20% is applicable on returns from units that are redeemed after staying invested for 3 years.
- Short term capital gains tax is applied as per an individual’s tax slab for returns from fund units that are redeemed before completion of 3 years.
The pandemic has made the world adopt a new normal in many ways, including the way we invest, how we spend, and also the thought process on savings. Investors are now highly focused on keeping the available capital safe. At the same time, more investors have a higher risk appetite as they go international with their portfolios. What better way to explore the international markets than investing in US stocks through the easy route of mutual funds.
ETFs allow investors to gain an exposure to the US stock markets without going through the hassle of actively selecting individual stocks for investment apart from following various formalities related to direct investment. These also involve far lower cost in terms of expense ratio.
International mutual funds can offer geographical diversification, growth opportunities through investment in global market leaders, and also currency diversification, among other benefits.
For investing US stocks through mutual funds, you do not need a large sum since you can begin with a small SIP amount of as low as Rs. 500 to gain exposure to US markets. The maximum amount that you invest in US stocks through mutual funds entirely depends on your investment goals, risk appetite and financial decision.
To invest in the top performing ETFs or FoFs, you can simply download the Fisdom app on your smartphone. The app allows investors to access a range of mutual funds to select from based on personal risk appetite, investment horizon, and other factors.
While US and Indian stock markets have generated similar returns in the last decade, the US markets are known for lesser volatility as compared to the Indian markets. In terms of market capitalisation, US stock markets are also far larger in size as compared to the Indian markets.