The economic impact of Covid-19 has kept Indian and global markets volatile. Markets can trade at higher valuations and drop suddenly without investors realizing it.
This has caused a lot of confusion among investors about how to protect their investment portfolios.
With markets still unpredictable, experts suggest it’s the right time to invest in overseas equities like the U.S., especially for investors looking to manage risk through diversification.
Market experts suggest investing in U.S. stocks through Exchange Traded Funds (ETFs) and Funds of Funds (FoFs). So how can you invest in U.S. stocks through a mutual fund?
Read on, to know about U.S. stock mutual funds.
What are the mutual fund options to invest in U.S. stocks?
1. Actively managed international mutual funds
International equity mutual funds are the funds that invest a subsequent portion of their total amount in U.S. equities; meanwhile, maintaining some portion focused on Indian equities can be an ideal choice for fresh investors who want to have exposure to the U.S. stock market.
2. ETFs and FoFs
Barring exposure to the U.S. stock markets, Exchange-traded funds and Funds of Funds can provide diversification benefits to the investor’s portfolio looking for portfolio stability.
ETFs track an underlying index, providing an organized and transparent investment approach while providing exposure to foreign markets.
Fund of funds invests in several other mutual funds and allows investors to benefit from exposure to various investments with minimal investment amount.
ETFs or FoFs are the cost-effective mode of investment to gain exposure to the U.S. market.
3. Index mutual funds
These funds are passively managed funds and track a specific index from the U.S. stock market. These funds replicate the composition of an index and try to match the returns generated by the same index while charging a low expense ratio.
Benefits of investing in U.S. stocks
Many investors ask why they invest in U.S. stocks when many Indian stocks offer high growth. Let’s discuss some benefits of investing in U.S. stocks:
- Portfolio diversification: By investing in U.S. stocks, an investor can broaden & diversify the overall investment portfolio across the U.S. economy. This helps in mitigating any India-specific economic risks.
- The benefit of dollar appreciation: In 2011, the USD-INR exchange rate stood at about Rs. 47. And today, it is around Rs. 82. This indicates that an investor who has invested in the U.S. stock market could have gained 36% by simply taking advantage of the currency appreciation. This gain is apart from the gains that could be made from the U.S. stock market.
- Higher returns possibility through international exposure: Compared to the Indian stock market, the trends in the U.S. market have reflected comparatively lower volatility. The former has also provided higher returns on a currency-adjusted basis.
- Exposure to companies with higher growth potential: The U.S. market is considered a leader compared to other international markets due to technological innovation, pharmaceutical advancements, and industrial expansion. Investing in U.S. stocks allows Indian investors to benefit from many innovative and high-potential companies.
Who invests in U.S. Stocks through Mutual funds?
Investing in U.S. equities through mutual funds is ideal for 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 longer investment horizon and higher risk appetite
Mutual funds help reduce the overall risk that can arise from exposure to the U.S. stock market, but investors should be aware that equity investments carry the risk of loss.
Factors to consider when investing in International mutual funds
Investors should be aware of the following risks and tax considerations associated with investing in international mutual funds.
- Every international fund has some common risks that investors must be prepared to take while investing in these to gain exposure to U.S. stocks. These are:
- Exchange rate risk
- Foreign market risk
- Concentration risk
- Investors must also remember that any returns from international fund investments attract taxes in India. Some points to note here are:
- Any dividends of 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 redeemed after staying invested for three years.
- Short-term capital gains tax is applied per an individual’s tax slab for returns from fund units that are redeemed before the completion of 3 years.
Conclusion
The pandemic has forced the world to adopt a new normal in many ways: how we invest, spend, and think about saving.
Investors are now focused on keeping their available capital safe. At the same time, more investors are more willing to take risks when working internationally with their portfolios.
What better way to explore international markets than to invest in U.S. stocks easily through mutual funds?
