A Guide To Investing In The S&P 500 From India

The S&P 500 is a US stock market index that tracks the performance of 500 leading publicly traded companies in the US. It is a popular benchmark for the overall health of the US stock market. While you cannot invest directly in the index itself, there are a few ways to gain exposure to the S&P 500 from India. You can invest in S&P 500 index funds or exchange-traded funds (ETFs) that aim to replicate the index's performance, or you can buy stocks of individual companies within the index. Here are the key methods to invest in the S&P 500 from India:

- Direct Investment: You can open an overseas trading account with an Indian or foreign broker to directly purchase stocks listed on the S&P 500. Some Indian brokerage firms with ties to US stockbroking firms include ICICI Direct, Reliance Money, and Kotak Securities.

- Indirect Investment: You can invest in index mutual funds or ETFs that track the S&P 500. This provides diversification and exposure to a broad range of companies. Examples include Motilal Oswal S&P 500 Index Fund and Mirae Asset S&P 500 Top 50 ETF. You can also invest in Indian mutual funds with exposure to US markets, such as Franklin India Feeder – Franklin U.S. Opportunities Fund and ICICI Prudential U.S. Bluechip Equity Fund.

- Online Platforms: There are online platforms and applications that allow Indian investors to invest in foreign stocks and mutual funds, offering an easy way to gain exposure to the S&P 500.

Exchange-Traded Funds (ETFs)

An Exchange-Traded Fund (ETF) is a basket of securities that matches the underlying stock market index. An S&P 500 ETF will follow the S&P 500 index, which is based on the market capitalisation of the top 500 publicly traded companies in the US stock exchange. ETFs are passively managed by fund managers as they only need to adjust their holdings when the benchmark index changes.

ETFs are a good option for investors who want to limit their risk exposure while optimising their returns. They are also a low-cost option as they tend to have very low fees.

Some examples of S&P 500 ETFs available in India are:

• Vanguard S&P 500 ETF Fund: Introduced in 1996, this was the first ETF to follow the S&P 500 stocks.
• Mirae Asset S&P 500 Top 50 ETF: This ETF tracks the performance of the top 50 companies of the S&P 500 index. It is managed passively, with investments in stocks that match the weights of the stocks in the S&P 500 Top 50 Index.
• S&P 500 Vanguard ETF: This is an international mutual fund where Indian investors require an international trading account to invest.

To invest in these ETFs, you can either open an overseas trading account with an Indian broker that has tie-ups with US stockbroking firms or directly with an international brokerage firm that operates in India.

It is important to note that investing in foreign indices carries risks, including fluctuations in foreign markets and currency conversion charges.

Indian Mutual Funds with Exposure to the S&P 500

There are several Indian mutual funds that provide investors with exposure to the S&P 500, allowing them to invest in US markets and gain access to some of the most influential US companies. These funds offer a convenient way to diversify portfolios and benefit from the growth and stability of the S&P 500 index. Here are some examples of Indian mutual funds with exposure to the S&P 500:

Franklin India Feeder – Franklin U.S. Opportunities Fund

This fund invests in units of the Franklin U.S. Opportunities Fund, which has a significant allocation of its assets in US stocks, including those in the S&P 500. By investing in this fund, Indian investors can gain indirect exposure to the S&P 500 and benefit from the performance of US companies.

ICICI Prudential U.S. Bluechip Equity Fund

The ICICI Prudential U.S. Bluechip Equity Fund focuses on investing in blue-chip US companies, many of which are part of the S&P 500. Blue-chip companies are known for their strong financial performance and stability, making this fund a potentially attractive option for investors seeking exposure to established US businesses.

Motilal Oswal S&P 500 Index Fund

The Motilal Oswal S&P 500 Index Fund is an exchange-traded fund (ETF) that replicates the performance of the S&P 500 index. It offers Indian investors a straightforward way to invest in the top 500 US companies and is traded on the Indian stock exchanges (NSE and BSE), making it easily accessible for residents of India.

Mirae Asset S&P 500 TOP 50 ETF

The Mirae Asset S&P 500 TOP 50 ETF is an open-ended scheme that tracks the performance of the S&P 500 Top 50 Total Return Index. This fund provides exposure to the top 50 largest companies within the S&P 500 index, reflecting the performance of US mega-cap companies. It is passively managed, aiming to match the weights of the stocks in the underlying index.

Vanguard S&P 500 ETF Fund

Vanguard introduced the first mutual fund that mimicked the S&P 500's performance in 1976, and in 1996, they launched the first exchange-traded fund (ETF) following the same group of S&P stocks. This fund provides individual investors with exposure to investing in the top US corporations through a single investment.

When considering Indian mutual funds with exposure to the S&P 500, it is important to evaluate the funds based on various factors such as expense ratios, past performance, and fund management. Additionally, ensure compliance with regulations like the Foreign Exchange Management Act (FEMA) and consider the potential impact of currency exchange rates and tax implications on your investments.

Direct Investment

Opening an Overseas Account with an Indian Broker

Indian brokerage firms such as ICICI Direct, Reliance Money, and Kotak Securities act as intermediaries and execute trades on behalf of Indian investors. These firms transfer money to their international partners, and investors must submit declarations and forms to the authorised dealer. It is important to note that these brokerage firms may have restrictions on the number of trades and types of investments, and the costs are typically higher due to brokerage fees, currency exchange rates, and conversion charges.

Opening an Overseas Account with a Foreign Broker

Alternatively, you can open an overseas account directly with an international brokerage firm that has a presence in India, such as Ameritrade or Charles Schwab. It is essential to understand the brokerage fees/structure and other costs before buying stocks through these firms.

Compliance, Currency Exchange, and Tax Implications

Regardless of the broker you choose, there are a few other key considerations to keep in mind when investing directly in the S&P 500 from India:

• Ensure compliance with the Foreign Exchange Management Act (FEMA) and the Liberalised Remittance Scheme (LRS), which allows Indian residents to remit up to USD 250,000 per financial year for investments and other purposes.
• Be mindful of currency exchange rates and potential fluctuations, as investments in US dollars can impact returns when converted back to Indian rupees.
• Understand the tax implications of investing in foreign securities, including capital gains tax and double taxation treaties between India and the US.

Index Mutual Funds

One of the key benefits of investing in index mutual funds is diversification. By investing in an index fund, you gain exposure to a broad range of stocks across different sectors, reducing the risk associated with investing in a single company or industry. Index funds are also relatively easy to manage, as investors do not need to actively track the fund's performance.

In India, there are two main types of index mutual funds: Index Mutual Funds and Index Exchange-Traded Funds (ETFs). ETFs are traded on the stock exchange, so you would need a demat account to invest in them. Some examples of index mutual funds in India include the Motilal Oswal S&P 500 Index Fund and the Mirae Asset S&P 500 Top 50 ETF, which track the S&P 500 index.

When investing in index mutual funds, it is important to consider the fund's tracking error, which is the difference between the fund's performance and the performance of the underlying benchmark index. A lower tracking error indicates that the fund is more closely replicating the index's performance. Additionally, investors should consider the fund's expense ratio and their own investment goals, risk tolerance, and time horizon.

S&P 500 Index Funds

The S&P 500 Index, also known as the Standard & Poor's 500 Index, is a stock index that consists of the top 500 largest publicly traded companies in the US. It is widely considered the best indicator of how US stocks are performing overall. The S&P 500 is a market-capitalization-weighted index, meaning that a company's valuation determines how much influence it has over the index's performance. The index is calculated using the formula: Weighted Market Capitalisation in S&P = Total number of outstanding shares X market price of the share.

How to Invest in S&P 500 Index Funds from India:

There are two main ways to invest in the S&P 500 from India: direct investment and indirect investment.

Direct Investment:

To invest directly in the S&P 500, you need an overseas trading account, which can be opened with either a domestic or foreign broker. Several Indian brokerage firms, such as ICICI Direct, Reliance Money, and Kotak Securities, have tie-ups with US stockbroking firms and can act as intermediaries. When opening an overseas account with an Indian broker, you will need to submit an account opening form, KYC documents, and certain declarations and forms to the authorised dealer. It is important to note that these brokerage firms may have restrictions on the number of trades and types of investments, and the costs are usually higher due to brokerage fees, currency exchange rates, and conversion charges.

You can also open an overseas account directly with an international brokerage firm that has a presence in India, such as Ameritrade or Charles Schwab. However, it is essential to understand the brokerage fees/structure and other costs before buying stocks through these firms.

Indirect Investment:

Indirect investment in the S&P 500 can be done through index mutual funds or Exchange-Traded Funds (ETFs). There are many Asset Management Companies (AMCs) or mutual fund houses that invest in the S&P 500 index. The objective of an index fund is to mimic the performance and portfolio of the S&P 500. Some examples of index mutual funds/ETFs that follow the S&P 500 index include the Motilal Oswal S&P 500 Index Fund, Mirae Asset S&P 500 Top 50 ETF, and the Vanguard S&P 500 ETF.

Benefits of Investing in S&P 500 Index Funds:

• Diversification: The S&P 500 index provides exposure to a diverse range of companies across different sectors and industries, reducing the risk associated with investing in individual stocks.
• Low Cost: Index funds tend to have very low fees, making them attractive to investors who want to limit their risk exposure while optimising their returns.
• Strong Performance: The S&P 500 has a proven track record of generating robust returns over the long term.
• Simplicity: Investing in an S&P 500 index fund is a simple and easy way to gain exposure to US corporations without having to research and select individual stocks.
• Suitability for Risk-Averse Investors: Index funds are passively managed, and the fund merely invests in stocks already present in the index, making them a safer option with more predictable returns.

Things to Consider:

• Fluctuations in Foreign Markets: Investors must be comfortable with fluctuations in foreign markets, which can affect the value of their investments.
• Risk Tolerance and Investment Goals: While the S&P 500 can be a good strategy for diversification and long-term growth, it is important to consider your risk tolerance and investment goals before investing.
• Currency Conversion Charges: When investing in foreign indices, it is essential to understand the associated currency conversion charges.
• Expense Ratio: It is important to check the expense ratio of the index fund before investing, as this will impact your overall returns.
• Sales Load: If investing in mutual funds, avoid funds that charge a sales load or commission. ETFs do not typically charge a sales load.

Example of an S&P 500 Index Fund:

One example of an S&P 500 index fund is the Motilal Oswal S&P 500 Index, which is an open-ended index fund designed to mimic the return of S&P 500 firms. It is passively managed, meaning there is no fund manager selecting the stocks, and it will generate returns like the S&P 500 index. Investors can invest in a lump sum or set up a Systematic Investment Plan (SIP) to invest regularly.

Investing in S&P 500 index funds offers Indian investors a way to diversify their portfolios, gain exposure to leading US companies, and potentially achieve strong long-term returns. By following the steps outlined above, investors can carefully consider their options and choose the best investment approach for their needs.

Frequently asked questions