How to invest in US stocks via mutual funds

In today’s world, where gaining access to global investment products and services is at one’s fingertips, it is common for Indian investors to eye the world’s largest and most innovative US companies while shaping their financial portfolios.

The success of companies like Apple, Amazon, Met, and Google over the decades has inspired immense trust in investors across the globe. However, as easy as it may sound, complexities like international brokerage accounts and currency exchange rates have made it challenging for Indian investors to invest directly in US stocks.

But don’t let your investment spirit shrink this festive season – Indian mutual funds investing in US stocks make it easier for you to gain exposure to US stocks without the hassle of managing overseas transactions.

This article serves as a guide to those interested in investing in US stocks. It explains with clarity how Indian mutual funds investing in US stocks work, their benefits, risks, taxation, and who can consider investing in such investment vehicles.

• Table of contents

• Ways to invest in US stocks for Indian MF investors
• Points to note on US-focused international MFs
• Who should invest in international mutual funds?
• What are the risks of investing in international mutual funds?
• What are the tax implications of international MFs?

Ways to invest in US stocks for Indian MF investors

Indian MF investors can invest in US stocks through mutual funds that focus on international markets, typically fund of funds (FoFs).

To explain further, an international mutual fund is a type of investment scheme that primarily allocates its assets to equity or equity-linked instruments of companies listed on foreign stock exchanges.

Furthermore, these funds may include investments in debt securities, offering a diversified portfolio. By leveraging these mutual funds, investors can gain exposure to the US market without directly purchasing individual stocks.

Points to note on US-focused international MFs

Expense ratios

International mutual funds generally have higher expense ratios compared to Indian mutual funds. These additional costs include management fees, administrative charges, and currency conversion fees, which can reduce the overall returns for investors.

Regulatory limits

Indian Asset Management Companies (AMCs) have restrictions on how much they can invest in international markets. The Reserve Bank of India (RBI) imposes an overall cap on foreign investments, which can limit the ability of fund managers to diversify into global markets.

Market cycles

The stock market cycles in the US are different from those in India and this can affect the performance of international funds. Investors may experience returns that don’t align with their expectations based on Indian market trends.

Who should invest in international mutual funds?

While any investor aspiring to invest in US stocks can invest in international mutual funds, it is said that investing in these funds is most suitable for the following investors:

Diversification seekers

Investors who want to diversify their investment portfolio across geographies can opt for these funds. These funds help reduce reliance on Indian markets by exposing investors to global markets.

Long-term investors

To capitalise on the successful journey of the US companies, a vision to stay invested for a longer period is advisable. Any investor with a horizon of 5-7 years or more can benefit from potential growth in international markets.

Dollar income aspirants

Individuals looking to hedge against rupee depreciation or planning for expenses in dollars can consider these funds.

Risk-tolerant investors

Risk assessment is one of the important considerations of any investment. International mutual funds also carry potential risks such as market and currency risks. Hence, they are better suited for those who can handle volatility.

Let’s discuss the risks further.

What are the risks of investing in international mutual funds?

Market risk

The returns from US-focused funds depend largely on how well the US market performs. Moreover, global economic events can influence these returns.

Currency risk

If the Indian rupee strengthens against the US dollar, the value of your investments in US funds could decrease, lowering your overall returns.

Geopolitical risks

Changes in political or economic policies in the US can impact the stability and growth of its stock market, which may affect your investments.

Higher costs

International mutual funds often have higher management fees compared to domestic funds. These additional costs can impact net returns.

Tax complexity

The taxation rules for international funds are different from those for Indian equity funds, which could make tax planning more complicated and affect your profits.

What are the tax implications of international MFs?

Under the latest taxation rules, gains from international Fund of Funds are categorised as Long Term Capital Gains (LTCG) if the investment is held for over 24 months. Also, gains from international ETFs are categorised as LTCG if the units are held for over 12 months.

• LTCG – Taxed at 12.5% beyond the annual Rs. 1.25-lakh exemption limit.
• STCG – Taxed at the investor’s applicable slab rate

It is always advisable to consult a tax advisor to understand the implications fully before investing in International mutual funds.

Conclusion

Mutual fund investing in US stocks offers Indian investors a seamless way to gain exposure to some of the world’s largest and most innovative companies. By investing through international mutual funds, investors can diversify their portfolios and potentially benefit from the growth of the US economy. However, it is crucial to consider the associated risks, costs, and tax implications before investing. Choose funds that align with your financial goals, risk tolerance, and investment horizon. Remember, while international mutual funds can enhance the return potential, they also come with their share of complexities. Careful planning and regular review of your investments can help you make the most of this opportunity.

FAQs:

Can Indian mutual funds invest in stocks listed on the U.S. stock market?

Yes, Indian mutual funds can invest in US stocks either directly or indirectly. They achieve this through international mutual funds or funds of funds (FoFs) that allocate money to US equities or ETFs tracking US indices.

Can I invest in U.S. mutual funds via a Systematic Investment Plan (SIP)?

Yes, you can invest in international mutual funds that focus on US stocks through a SIP. This method allows you to invest systematically, spreading the risk over time and leveraging the power of compounding.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.