Investing in US Stocks: A Guide for Indian Investors via Mutual Funds

Indian investors are looking to invest in international markets for earning a higher return on their investments. In fact, the S&P 500 index increased by over 200% in the past 10 years, while the S&P BSE Sensex nearly doubled during this period. 

The primary Wall Street indices – Dow Jones (DJI), Nasdaq (IXIC), and the S&P 500 (GSPC), too have doubled the returns for investors in the past five years. 

Since mutual funds (MFs) investments (SIP or lumpsum) are made with a long-term perspective, the returns are even better than the equities. 

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While a few investors look to global markets for its attractive returns, many investors mainly look for portfolio diversification. The high returns are witnessed not just in equities but also in mutual funds. 

Let’s understand how to invest in US stocks via mutual funds.

Ways to invest in US stocks for Indian MF Investors

Currently there is only one way to invest in US stocks via Indian mutual funds. Individuals can make investments in US stocks by opting for US-focused international mutual funds. These are mostly overseas FoFs (fund of funds) or other international mutual funds.

An international mutual fund is a scheme that predominantly invests in equity or equity-related instruments of entities listed in the markets of a foreign country. It also invests in debt securities.

Points to note on US-Focused International MFs

Prospective investors should note that US-focused international mutual funds provide the benefit of diversification. 

International diversification can be beneficial (in terms of high returns) and risky. It is risky in cases when you do not understand their market, rules and regulations, factors affecting their markets and economy and other geography-specific factors.

Mutual funds that invest in US markets cornered the maximum flows in the initial six months of FY2021 as per various media reports. 

The table below is an example of a few US-focused mutual funds and highlights their performance based on trailing returns.

Mutual Fund Returns (approximate figures) Asset 

Management Company 3 Years 5 Years Year-to-Date ICICI Prudential US Bluechip Equity Fund 17.74% 19.01% 18.50% ICICI Prudential Mutual Fund Nippon India US Equity Opportunities Fund 18.41% 19.49% 18.92% Nippon India Mutual Fund Motilal Oswal NASDAQ 100 ETF 27.23% 28.19% 20.19% Motilal Oswal Mutual Fund

Data as of 28 September 2021, source – Value Research

Who Should Invest in International Mutual Funds?

Any investor planning to venture into the global investing landscape, especially in US markets, can invest in these mutual funds. That said, investing in international MFs is suitable for individuals with the following objectives:

• Enabling geographical diversification to lower the risk of overall equity portfolio
• Creation of hedge against the depreciation of rupee
• Supplementing domestic exposure to equity with foreign economies

According to some experts American companies, such as Netflix, Amazon, Facebook, Microsoft, could be well-positioned to handle any disruptions in the global economy. 

However, no investment should be considered completely risk-free. A tech slowdown in the US can hamper investments in such big stocks as well.

Typically, international mutual funds are well-suited for investors with a long-term investment horizon and higher risk appetite. 

Moreover, they should be comfortable with the associated risks of investing in these MFs. 

What are the Risks of Investing in International Mutual Funds?

Investing in these mutual funds involves a few minimal risks:

• Foreign market risk: International MFs expose their investors to the economic, political, and market risks of foreign economies. These risks may be higher in the case of a few emerging markets due to factors like lack of liquidity and regulatory framework. 
• Exchange rate risk: Foreign exchange rates are subject to fluctuations. Therefore, when such fluctuations take place, they have an adverse impact on returns.
• Concentration risk: An international MF with a concentrated investment portfolio may affect the returns in case of any sector specific downturns. It comes with higher risk as well as high return fluctuations.

What are the Tax Implications of International MFs?

International mutual funds are taxed like any other MFs in India:

• Long-term capital gains or LTCGs on the redemption of units post 3 years of investment are taxable at the rate of 20% with indexation benefits. 
• Short-term capital gains or STCGs on MF units redeemed prior to 3 years of investment are taxed according to an investor’s tax slab.
• For dividends above Rs 5000, they are taxed based on an investor’s tax slab. Resident investors are generally subject to TDS at the rate of 10% (which is at 7.5% at present). Non-resident investors are liable to pay TDS at the rate of 20%.