- Mutual funds help Indians invest in equities not normally available to foreign direct investors.
- The United States is an economic powerhouse, and its companies offer strong growth potential.
- Indians looking to diversify to foreign economies may wish to include U.S. mutual funds in their portfolios.
International mutual funds are becoming increasingly popular with Indian investors. These managed funds give Indians access to foreign equities that aren’t normally open to foreign direct investors. Indians looking to get exposure to international markets may find mutual funds a convenient way of achieving this, especially if they lack the time, knowledge or confidence to manage their portfolios by themselves.
Why Choose U.S. Mutual Funds?
The United States has a GDP of more than $20 trillion,1 making it the biggest economy in the world. It attracts innovative, high-growth companies because of the strength of its economy. If you’re looking for medium or long-term growth opportunities, investing in U.S. mutual funds is one way of achieving this. In addition, if your existing portfolio is heavily weighted towards Indian equities, adding some international exposure can help you hedge against the risk of a recession in the Indian markets.
Access a Powerful Global Market
Many major companies don’t trade directly on the Indian markets. This is particularly true of tech companies. Facebook (Meta), Apple, Google (Alphabet) and Microsoft are all regarded as desirable investments but aren’t something Indians can simply call a local broker to invest in directly. Using mutual funds gives these would-be investors a way to put their money into a carefully curated portfolio of equities that the fund manager feels are some of the best choices in that company’s market.
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According to some estimates, as many as 90% of retail traders lose money.2 It’s incredibly rare for a retail trader to outperform the wider markets. Attempting to pick stocks is a waste of time and can be a source of anxiety for many people. Investing in mutual funds reduces this stress because the fund manager is responsible for building a portfolio of equities for you. Each fund has different anticipated returns and risk levels, so you can choose something that makes sense based on your goals and how long you’re planning on letting the investment mature.
Top U.S. Funds Open to Indian Investors
Several of the most popular U.S. funds are open to Indian investors. In particular, trusted institutions such as Fidelity and Vanguard welcome foreign investors. Other options include the ICICI Prudential and the Franklin India Feeder Fund. Before choosing a fund, look at the fee structure and do some research into how the fund chooses the equities included in it. Each fund has its own methods and is designed for people with a specific risk profile.
1. Vanguard Total Stock Market Index Fund
The Vanguard Total Stock Market Index Fund,3 or VSTAX, is a long-running index fund. It was created in 2000 and aims to cover the full spectrum of the U.S. equity market, including small-, mid- and large-cap companies. The VSTAX has a minimum investment requirement of $3,000 and a relatively low expense ratio. It may be an appealing option for investors less focused on exposure to specific companies or sectors and simply desire exposure to the broader economy of the United States.
2. ICICI Prudential U.S. Blue Chip Equity Direct-Plan Growth
The ICICI Prudential U.S. Blue Chip Equity Direct-Plan Growth4 fund is a long-term equity fund aimed at Indian investors. The fund primarily invests in equities listed on the U.S. stock market; however, it also purchases ADRs/GDRs issued by foreign (and Indian) companies. It’s considered a high-risk fund with a lot of volatility but high growth potential. The fund was launched in 2012 and covers a variety of industries, including finance, retail, biotechnology and software.
3. Fidelity 500 Index Fund
The Fidelity 500 Index Fund,5 or FXAIX, tracks the S&P 500. This fund is open to international investors and is an interesting option for those looking for moderate risk and growth over the medium term. The top 10 equities in the fund account for more than one-quarter of its value. The FXAIX includes many of the top U.S. tech companies, such as Meta, Alphabet and Microsoft. It requires a minimum investment of $2,500, making it a relatively accessible option.
4. Franklin India Feeder U.S. Opportunities Direct Fund
The Franklin India Feeder U.S. Opportunity Direct Fund6 is a growth-focused fund open to Indian investors. It invests in companies of various sizes and across several industries, providing Indian investors with diverse exposure to the U.S. markets. As of February 2022, the fund is temporarily closed to new investors due to investment limits set by the RBI. However, this is reviewed regularly, so it’s worth contacting the fund to ask to be notified when it opens to new customers.
How to Invest With U.S. Mutual Funds
If you’d like to invest in one of the above funds, you can do so by opening an account with the fund manager directly. Due to legal limits on overseas investments, funds have a cap on the number of customers they can take each year. If you’re unable to sign up for the fund you’re interested in, ask to join a waiting list. Be aware that some funds have minimum investment requirements, and there may be other management fees or fees per trade. It pays to shop around to find the best fund option based on your financial circumstances.
The Tax Implications of Foreign Investing
Income from overseas investments is taxed in the same fashion as income from debt funds. If you sell your investments for a profit, this generates capital gain. The tax rate on that capital gain depends on whether the investment was short-term (held for less than 3 years) or long-term. Short-term capital gains are taxed according to your tax bracket. Long-term capital gains are taxed at a rate of 20%. If you’re unsure about the best way to manage your investments with regard to taxation, talk to a financial advisor. They can help you get your tax affairs in order and choose the most tax-advantageous routes for your investing.
Always Diversify Your Investments
Investing in U.S. mutual funds offers good potential for medium-term growth but also comes with some risks. A robust investment portfolio would include other investments too, such as commodities, shares in Indian companies and other international investment vehicles. By diversifying your portfolio, you’ll give yourself a buffer against recessions affecting any one industry or geographic area. There’s always some risk when you invest in mutual funds, but with proper planning and sensible risk management strategies, it’s possible to manage that risk, especially if your investment timeline is measured in years.
Seek Professional Advice Before Making Investment Decisions
Everyone’s financial situation, long-term goals and risk tolerance level is different. Before making any investment decisions, it’s vital to seek professional financial advice. Online guides can give you an idea of the options available to you. However, they can’t give advice tailored to your circumstances. Speaking to someone who knows your individual situation can help you make decisions that will put you on the right track to achieve your long-term personal finance goals, whatever they may be.