How can I invest in the US market via Indian mutual funds? (2024)

Q. I am a software engineer working with an MNC in Pune, my wife is also a software engineer working with an Indian IT company. Recently, I learned from a cousin working in the U.S.A., that the U.S. stock market regularly outperforms the Indian stock market. I wish to invest in the US stock market. Can you please elaborate on Indian mutual funds investing in the US exclusively, their pros, cons, and tax treatment? Additionally, please elaborate on how I can invest in them, will I require a US bank account for the same?

Omkar Shetty, Pune, Maharashtra

In the realm of investments, diversification is a key mantra, and venturing beyond the familiar shores of the Indian stock market can open up a world of possibilities. Indian international mutual funds, particularly those with a focus on the S&P 500, offer an enticing avenue for Indian investors to tap into the dynamic and growth-oriented US equity market.

Comparing the performance of US and Indian stock markets

The US stock market has consistently outperformed its Indian counterpart over the long term. This performance gap stems from various factors, including the larger size and maturity of the US economy, its robust corporate governance practices, and its deep liquidity. Moreover, the US stock market boasts a greater exposure to cutting-edge technologies, which have been a driving force behind economic growth in recent years.

Understanding the mechanism of Indian mutual funds investing in the US stock market

Indian international mutual funds investing in the US stock very often are index funds investing in Nasdaq 100 or or any other US indices. The S&P 500 is a stock market index that tracks the performance of 500 of the largest publicly traded companies in the United States. It is a widely considered benchmark for the US stock market and has a long history of strong performance.

Benefits

Diversification: By investing in Indian international mutual funds focusing on the US stock market, Indian investors can broaden their portfolios beyond the domestic market, mitigating exposure to country-specific risks.

Access to global opportunities: These funds provide exposure to the US economy, the world's largest and most dynamic, offering access to a diverse range of investment opportunities.

Potential for higher returns: The US stock market's historical outperformance over the Indian market suggests the potential for higher long-term returns.

Professional management: Mutual funds are managed by experienced fund managers who actively monitor and rebalance the portfolio to align with market conditions.

Drawbacks

Currency risk: Investments in US-based funds are subject to currency fluctuations, which can impact returns if the rupee depreciates against the US dollar.

Higher expense ratios: FOFs typically have higher expense ratios compared to domestic mutual funds due to the additional layer of management and administrative costs.

Tax treatment: Indian mutual funds investing in US equities are classified as debt mutual funds and are taxed accordingly. We have elaborated on this in detail below:

Tax treatment of Indian international funds

Under regulations promulgated by the Securities and Exchange Board of India, mutual funds investing at least 65 % of their corpus in equities are classified as equity mutual funds. However, Indian mutual funds investing in the US stock market are classified as debt mutual funds even if they are investing in equities. Consequently, they are taxed as debt mutual funds. The taxation of debt mutual funds in India has undergone significant changes following the Union Budget 2023. Before the budget, long-term capital gains (LTCG) from debt mutual funds held for more than three years were taxed at a flat rate of 20%, with indexation benefits to adjust for inflation.

However, the budget abolished indexation benefits for debt mutual funds, effective from April 1, 2023. Under the new tax regime, all capital gains from debt mutual funds, regardless of holding period, are now taxed at the investor's applicable slab rate.

How to invest in the US market via Indian mutual funds?

Investing in Indian mutual funds investing in US equities using no-brokerage investment platforms is a straightforward process that can be completed in a few simple steps:

(a) Create an account

(b) link your bank account

(c) choose an Indian mutual fund investing US equity exclusively

(d) initiate investment.

In conclusion, Indian international mutual funds with a focus on the S&P 500 offer Indian investors a compelling opportunity to diversify their portfolios and potentially achieve higher long-term returns. While careful consideration of currency risks, expense ratios, and tax implications is essential, the potential benefits of exposure to the dynamic US equity market make these funds an attractive investment option for discerning investors.

Kuvera is a free direct mutual fund investing platform.

Note: This is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.

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Published: 08 Dec 2023, 09:10 AM IST