Of late, an increasing number of Indian investors are opting to invest in markets beyond the country’s boundaries, especially the U.S. stock market. The U.S. market is the largest stock market in the world and offers exposure to a wider range of fundamentally strong stocks, including the much-coveted tech companies such as Apple, Netflix, Meta, Alphabet, Microsoft and Amazon.
That said, being an investor based out of India, getting direct access to the U.S. stock market is neither easy nor straightforward. Fortunately, Indian mutual funds have come up with a simpler way for domestic retail investors to gain exposure to international financial markets. If you, like many others, are wondering how to invest in U.S. mutual funds from India, this article has everything you need to know.
How can Indian investors invest in U.S. mutual funds?
If you are an Indian investor, the easiest way to invest in U.S. mutual funds is by purchasing units of a U.S.-focused Fund of Funds (FOF). A Fund of Funds is a type of mutual fund that invests in other mutual fund schemes, including funds that are listed in international markets.
By investing in the U.S.-focused FOF, you can indirectly gain exposure to U.S. mutual funds. Most Funds of Funds choose to invest in U.S. index funds that track broad market indices such as the Dow Jones Industrial Average (DIJA), the S&P 500 or the NASDAQ Composite.
How to invest in U.S. mutual funds from India?
If you are seeking exposure to the U.S. stock market, here is a brief overview of the process you need to follow to invest in U.S. mutual funds.
- Step 1: Open a trading and demat account with a stockbroker of your choice. The units of the U.S. mutual fund you purchase will be safely stored electronically within the demat account.
- Step 2: Conduct thorough research and select a Fund of Funds that invests in your preferred U.S. mutual fund or index fund. When selecting the fund, remember to consider factors such as its objective, investment strategy, historical performance and management track record, among others.
- Step 3: Choose the method of investment. There are two different ways to invest in U.S. mutual funds. You can either make a lump sum investment or opt to invest via a Systematic Investment Plan (SIP).
That’s it. Once the investment is made, the units of the Fund of Funds will be delivered to your demat account. Now, if the Net Asset Value (NAV) of the U.S. mutual funds collectively increases, the NAV of the Fund of Funds will also increase, and vice versa. Therefore, as an investor, it is important to monitor your mutual fund investments periodically. This will give you insights into how your investment is performing.
Benefits of investing in U.S. mutual funds
With how to buy U.S. index funds from India out of the way, let us now shift our focus towards understanding the various benefits of investing in U.S. mutual funds.
- International diversification
Investing in U.S. mutual funds lets you diversify your investment portfolio across geographies. This could potentially mitigate market risk to a certain extent, insulating your portfolio from the negative impact due to adverse market movements. - Exposure to leading global companies
U.S. mutual funds provide exposure to world-class companies, enabling you to participate in their growth. Including such funds in your portfolio could also boost its wealth creation potential significantly. - Easy and straightforward
Investing in a Fund of Funds that invests in U.S. mutual funds is the simplest way to get access to the country’s stock market. It lets you avoid the various complexities and pitfalls that are commonly associated with investing in international markets.
Risks associated with investing in U.S. mutual funds
As a potential investor, it is important for you to also understand the various risks involved with mutual funds. Here is a quick overview of some of the key risks associated with these funds.
- Exchange rate risk
Fluctuations in the USD-INR exchange rate could potentially impact the value of your investments. For example, if the Indian Rupee depreciates, the value of your investments could grow, and vice versa. - Regulatory risk
Changes in the regulatory and economic policies of the U.S. could also have a major impact on your investments. Therefore, it is advisable to watch out for these factors if you are planning on investing in U.S. funds. - Liquidity risk
Some Fund of Funds that invest in U.S. mutual funds may have low liquidity. This could make redeeming your investments more challenging, often leading to considerable time delays.
Who should invest in US Mutual Funds?
Indian investors looking to diversify their portfolios and potentially earn higher returns can consider investing in US mutual funds. These funds offer exposure to the US stock market, which has historically performed well, with indices like the S&P 500 and Dow Jones Industrial Average (DJI) delivering significant returns over the past decade.
- Long-term investors: US mutual funds are suitable for investors with a long-term perspective, as they can ride out market fluctuations and benefit from the growth potential of the US market.
- Risk-takers: Investors willing to take on higher risk in pursuit of higher returns can consider US mutual funds, which offer exposure to a diverse range of sectors and companies.
- Diversification seekers: Investors looking to reduce their portfolio risk by diversifying across different markets can benefit from US mutual funds, which provide exposure to the US stock market.
Tax implications of US mutual funds
Investing in US mutual funds can have significant tax implications for Indian investors. Here are key points to consider:
- Short-term capital gains: Investments in US mutual funds for less than 12 months are considered short-term and are taxed at the investor's ordinary income tax rate of 15%.
- Long-term capital gains: Investments held for more than 12 months are considered long-term and are taxed at a lower rate, currently 15% or 20% depending on the investor's tax bracket.
- Dividend distributions: Dividend distributions from US mutual funds are taxed as ordinary income, and investors must report them on their tax returns.
- Cost basis: Investors must keep track of the cost basis of their shares to determine capital gains and losses. The IRS allows taxpayers to use either the specific share identification cost basis method or the first-in, first-out cost basis method
Mechanism of US mutual funds investing
Investing in US mutual funds provides Indian investors with a gateway to the US stock market. Here's a step-by-step guide on how it works:
1. Research and select a mutual fund
- Fund selection: Choose a mutual fund that aligns with your investment objectives and risk tolerance.
- Fund performance: Evaluate the fund's historical performance and risk profile.
2. Open a demat and trading account
- Demat account: Open a dematerialized account to hold your mutual fund investments.
- Trading account: Open a trading account to facilitate transactions.
3. Complete KYC norms
- Know your customer (KYC): Ensure your KYC documentation is complete for compliance with regulatory requirements.
4. Investment and allocation
- Investment amount: Decide on the amount you want to invest, either as a lump sum or through a systematic investment plan (SIP).
- Fund allocation: Allocate your investment to the chosen mutual fund.
5. Monitor your investment
- Portfolio tracking: Keep track of your mutual fund's performance and adjust your portfolio as needed
Indexation Benefit
Indexation allows you to adjust the purchase cost of your investment for inflation using the Cost Inflation Index (CII), as provided by the Income Tax Department. By increasing the purchase price to reflect inflation, your taxable gains are reduced, resulting in lower taxes on long-term investments.
Dividend Taxation
Dividends exceeding Rs. 5,000 from these international funds are taxed according to your applicable income tax rate, meaning the tax will vary based on your total income. Additionally, Tax Deducted at Source (TDS) is applicable to these dividends. For resident investors, TDS is generally 10% (temporarily reduced to 7.5%). For non-resident investors, the TDS rate is 20%.
Things to Consider Before Investing in Best International Mutual Funds
While investing in international mutual funds can provide attractive opportunities, it’s important to keep the following factors in mind:
- Currency Risk: Fluctuations in exchange rates can affect the value of your investment, as the underlying assets are priced in foreign currencies.
- Legal and Political Risks: International investments are exposed to the legal and political environments of the countries where the fund operates, which can introduce additional uncertainties.
- Tax Implications: The tax treatment of foreign funds may differ from that of domestic investments, so it’s crucial to understand the tax consequences before investing.
- Higher Costs: International funds often have higher expense ratios and management fees compared to local funds, which can impact your overall returns.
- Market Volatility: Global markets can be more volatile than domestic ones, leading to greater fluctuations in the value of your investment.
Conclusion
With this, you must now be aware of how to invest in U.S. mutual funds from India. Now, before you proceed to invest, remember to thoroughly research and analyse the various mutual fund schemes to determine the one that suits your requirements.
The Bajaj Finserv Mutual Fund Platform can help you in this regard. The platform has a dedicated tool to compare mutual funds across different metrics. You can use the insights you gain from the comparison to identify the fund that is right for you.
