Mutual Funds: Us Market Investment Options For Indians

Indian investors are increasingly looking to invest in international markets to earn higher returns and diversify their portfolios. While Indian investors can directly invest in US stocks, mutual funds provide another avenue to invest in overseas companies and diversify their portfolios geographically. There are two types of mutual funds that invest overseas: fund of funds, which are local mutual funds that invest in international mutual funds, and local mutual funds that invest directly in international stocks. International mutual funds are taxed like any other mutual fund in India, with long-term capital gains taxed at a rate of 20% with indexation benefits, and short-term capital gains taxed according to the investor's tax slab.

Characteristics of Indian Mutual Funds that Invest in the US Market

US-focused international mutual funds

Benefits

Risks

Investing in international mutual funds carries some minimal risks, including foreign market risk, exchange rate risk, and concentration risk. Foreign market risk exposes investors to the economic, political, and market risks of foreign economies, which may be higher in emerging markets due to factors like lack of liquidity and regulatory framework. Exchange rate risk arises from fluctuations in foreign exchange rates, which can adversely impact returns. Concentration risk occurs when an international mutual fund has a concentrated investment portfolio, leading to higher return fluctuations in case of sector-specific downturns.

Taxation

International mutual funds are taxed similarly to other mutual funds in India. Long-term capital gains (LTCGs) on the redemption of units after three years of investment are taxed at a rate of 20% with indexation benefits. Short-term capital gains (STCGs) on MF units redeemed within three years are taxed according to the investor's tax slab. Dividends above INR 5,000 are also taxed based on the investor's tax slab, with resident investors generally subject to TDS at a rate of 10% (currently 7.5%) and non-resident investors liable for TDS at a rate of 20%.

Examples of US-Focused International Mutual Funds

• ICICI Prudential US Bluechip Equity Fund
• Franklin India Feeder Franklin US Opportunities Fund
• DSP US Flexible Equity Fund of Fund
• Edelweiss US Value Equity Offshore Fund
• Motilal Oswal Nasdaq 100 FOF Scheme
• Bandhan US Equity FoF
• Invesco India - Invesco Global Consumer Trends FoF

Suitability

In conclusion, US-focused international mutual funds offer Indian investors a way to diversify their portfolios, gain exposure to the US market, and potentially benefit from the growth of well-known American companies. While these funds offer attractive benefits, investors should carefully consider their investment objectives, risk tolerance, and the associated risks before venturing into international mutual funds.

Exchange-Traded Funds (ETFs)

There are many ETFs available that provide exposure to the US market. For example, the Invesco QQQ ETF is based on the Nasdaq 100 index, allowing investors to invest in 100 stocks with just one fund. Other ETFs provide exposure to specific sectors, such as healthcare or energy. For instance, the iShares U.S. Healthcare ETF provides exposure to the healthcare sector, while the Alps Clean Energy ETF provides exposure to the energy sector.

Indian investors can also invest in theme-based ETFs, which focus on emerging themes like cannabis, cloud computing, or mobility, rather than specific sectors. An example of this is the Global X Cloud Computing ETF, which invests in companies that are expected to benefit from the increased adoption of cloud computing technology.

ETFs also allow investors to access stock markets in other countries, such as China or Japan. For investors looking to invest in technology companies in China, the Invesco China Technology ETF provides exposure to companies like Baidu Inc and Tencent Holdings Limited.

Overall, ETFs provide Indian investors with a diverse range of investment opportunities in the US market and beyond, offering the benefits of broad exposure, real-time pricing, and lower costs compared to other forms of investing.

Fund of Funds (FoFs)

A Fund of Funds (FoF) is an investment strategy where a fund invests in a collection of mutual funds, rather than investing directly in stocks, bonds, or other securities. FoFs are often referred to as multi-manager investments.

FoFs are popular among investors seeking to diversify their portfolios and gain exposure to different asset classes. In India, FoFs typically invest in overseas mutual funds or Exchange-Traded Funds (ETFs). This provides Indian investors with access to foreign stocks, such as those of Alphabet (Google), Apple, and Microsoft.

FoFs offer benefits such as professional management, diversification, and simplified investment processes. However, they also have higher expense ratios due to layered fees and potentially diluted returns from extensive diversification.

There are two types of FoFs: fund of funds, which are local mutual funds investing in international mutual funds, and local mutual funds that invest directly in international stocks.

When investing in FoFs, it is important to consider factors such as investment goals, risk tolerance, and the fee structure. FoFs are suitable for long-term stability and growth but may not be ideal for maximizing short-term returns due to their higher expenses.

Local mutual funds that invest in international stocks

There are two types of mutual funds that invest overseas: fund of funds (FoFs) and local mutual funds that invest in international stocks. Here is a closer look at local mutual funds that invest in international stocks.

US-focused international mutual funds are one type of local mutual fund that invests in international stocks. These funds can provide the benefit of diversification, but international diversification can also be risky. For example, if you do not understand the market, rules and regulations, factors affecting the market and economy, and other geography-specific factors, you may face higher risks.

International mutual funds are well-suited for investors with a long-term investment horizon and a higher risk appetite. They are also a good option for investors who want to enable geographical diversification to lower the risk of their overall equity portfolio, create a hedge against the depreciation of the rupee, or supplement their domestic exposure to equity with foreign economies.

However, it is important to note that investing in international mutual funds comes with a few risks, including foreign market risk, exchange rate risk, and concentration risk. Foreign market risk is higher in emerging markets due to factors like lack of liquidity and regulatory framework. Exchange rate risk can adversely impact returns, as foreign exchange rates are subject to fluctuations. Concentration risk occurs when an international mutual fund has a concentrated investment portfolio, which can affect returns in the case of any sector-specific downturns.

In terms of taxation, international mutual funds are taxed like any other mutual fund in India. Long-term capital gains on the redemption of units after three years of investment are taxable at a rate of 20% with indexation benefits. Short-term capital gains on mutual fund units redeemed before three years of investment are taxed according to the investor's tax slab. For dividends above Rs. 5000, taxation is based on the investor's tax slab. Resident investors are generally subject to TDS at a rate of 10% (which is currently at 7.5%), while non-resident investors are liable to pay TDS at a rate of 20%.

Mutual funds that invest in international market leaders

Indian investors are increasingly looking to invest in international markets to earn higher returns and diversify their portfolios. While there are restrictions on overseas investment by mutual funds, there are still opportunities to invest in US stocks via Indian mutual funds.

US-Focused International Mutual Funds

US-focused international mutual funds are a popular way for Indian investors to gain exposure to the US market. These funds predominantly invest in equity or equity-related instruments of entities listed in the US market. They also invest in debt securities.

Some of the top US-focused international mutual funds include:

• Motilal Oswal Nasdaq 100 FOF Scheme
• Invesco India - Invesco Global Equity Income FoF
• ICICI Prudential US Bluechip Equity Fund
• Franklin India Feeder Franklin US Opportunities Fund
• DSP US Flexible Equity Fund of Fund
• Aditya Birla Sun Life Global Excellence Equity FoF
• PGIM India Global Equity Opportunities Fund

Exchange-Traded Funds (ETFs)

ETFs are another option for Indian investors looking to gain exposure to international markets. ETFs are traded on stock exchanges and offer a diversified portfolio of stocks or bonds. They are passively managed, resulting in lower expense ratios compared to actively managed mutual funds.

Examples of ETFs that provide exposure to the US market include:

• Invesco QQQ ETF, which is based on the Nasdaq 100 index
• IShares U.S. Healthcare ETF, which provides exposure to the healthcare sector
• Alps Clean Energy ETF, which provides exposure to the energy sector

Fund of Funds (FoFs)

FoFs are local mutual funds that invest in international mutual funds. They offer the convenience of investing through Systematic Investment Plans (SIPs) and Systematic Transfer Plans (STPs) without the need for a demat and broking account. FoFs provide a cost-effective way to gain exposure to foreign markets and can be a good option for investors looking for a focused exposure to a particular theme, sector, or market.

Things to Consider

When investing in international mutual funds, it is important to consider the risks involved, including foreign market risk, exchange rate risk, and concentration risk. Additionally, prospective investors should understand the tax implications of international MFs, which are taxed similarly to other MFs in India.

International mutual funds are generally suitable for investors with a long-term investment horizon and a higher risk appetite. It is recommended that investors have a well-diversified portfolio of Indian companies before venturing into international funds.

Frequently asked questions