How to invest in US stocks via Indian Mutual Funds? - Niyo (2024)

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Youcan now invest in and own a bit of the big Foreign companies likeGoogle and Apple from the comfort of your home! Niyo Wealth offersinvestments in international mutual funds on your Niyo app.

Q.For several years I have been looking for some exposure to the USfinancial markets. Yesterday, I learned about Motilal Oswal’s S&P500 index fund. I was wondering if it is available on Niyo Wealth
Ialso welcome any thoughts/opinions you might want to share aboutexposure to the US markets through Niyo Wealth, are there any caveatsI should be aware of?

Yes! You can definitely invest to get exposure to US financial markets by investing in International Motilal Oswal S&P 500 Index Fund is now available for investments on Niyo Wealth” with “is one of the mutual fund schemes you can invest in. But that’s not all! You can invest in the other US.

Contents

• Activemutual funds investing in both Indian and US equities.
• US-focusedactive mutual funds
• US-focusedIndex funds
• Whichoption to choose?
• Nasdaq100 or S&P 500 the difference?
• Caveatsfor Motilal Oswal S&P 500
• Factorsto keep in mind while investing in international funds

Currently,you have three options for getting exposure to US stock markets:

1.Activefunds investing in both Indian and US equities

Themost popular example isParagParikh Long Term Equity Fundwhichinvests up to 35% of the total investment in international equities(predominantly US) while keeping 65% or more in Indian equities. Thisallows the fund to be classified as an equity fund for taxationpurposes otherwise, international funds are classified as debtfortaxationpurposes, while giving you a decent exposure to US stocks. This is abig tax advantage!

However,for international investments, this fund takes very concentratedpositions in a handful of stocks instead of a broadly diversifiedportfolio like the S&P 500.

2.US-focused active mutual funds

Thesemutual funds either invest in US stock markets directly(e.g.FranklinIndia Feeder, ICICI Prudential, US Bluechip Equity Fund) or these canbe classified as fund of funds (FOFs) that invest in a US-basedactive equity mutual fund.

3.US focused Index mutual funds

Thesefunds track their corresponding US-based stock indices (e.g. MotilalOswal Nasdaq fund, Motilal Oswal S&P 500 fund).Thesefunds simply mimic their respective indices and match their returnswhile charging minimal fees.

BothUS focused active mutual funds and US focused Index mutual funds,like other international funds, are taxed like debt mutual funds.

Whichoption to choose?

Inour opinion, out of these three options, US-focused index funds vizMotilal Oswal Nasdaq 100 FOF and Motilal Oswal S&P 500 Indexfunds are the cleanest and the cheapest way to seek exposure to theUS financial markets.

Whyan index fund?

TheUS financial markets are considerably more mature and efficient thanIndian stock markets so it is very difficult for active fund managersto beat a diversified benchmark like the S&P 500.

In fact, according to thelatest SPIVA report– which tracks the performance of active US equity funds vis-a-vis their benchmarks – 80% of the fundsunderperformedthe S&P 500 over the 5-year period ending Dec 31, 2019.

Giventhis context, it is better to invest in an index fund that doesn’twarrant trying to identify a small group of active funds that willoutperform and then keep changing them as their performance wanes.

TheNasdaq 100 Indexisa basket of the 100 largest, most actively traded US companies listedon the Nasdaq stock exchange. The index includes companies fromvarious industriesexceptfor the financial industry(e.g.commercial and investment banks). These non-financial sectors includeretail, biotechnology, industrial, technology, health care andothers. The technology sector accounts for 54% of the index’s weight,followed by consumer services at about 25%. (Investopedia).

Onthe other hand,theS&P 500 isan index of the 500 largest US publicly traded companies. The indexis widely regarded as the best gauge of large-cap US equities. It isa more diversified index as compared to Nasdaq 100. Technology beingthe biggestsector still accounts for only about 25% (54% in Nasdaq), followed byhealthcare (15%) and the financial industry (10%).

Caveatsfor Motilal Oswal S&P 500

Theusual caveats of investing in a new index fund apply – mainly thatthe tracking error is unknown.

Whatis a tracking error?

Trackingerror can be explained as the deviation of the index fund returnsfrom that of the index itself. Running an index fund especially anoverseas fund requires a good deal of operational expertise whichderives a negligible tracking error.

However,there is always going to be some tracking error but it could be morebecause of operational difficulties than lack of operationalexpertise.

Factorsto keep in mind while investing in international funds

a)Taxation–As per the prevailing scenario, the return on investments will betreated as debt and not equity.

b)International exposure is a good way to diversify but diversificationdoesnotalwayslead to higher returns. Diversification can be a tool to reap averagereturns with reduced risk as the investments in different markets areexpected to move somewhat differently. In other words,diversification can mean, to settle for an average return on theinvestment by giving up on both the best and the worst casescenarios.

c)In the future, returns from US markets could be lower than that fromIndia. Or the other way round. No one really knows. So, you shouldn’tinvest thinking you will get definitely higher returns vs investingin India. That’sjust what has happened in the last decade or so. The future can bedifferent.Doit only to reduce your portfolio’s over-dependence on the Indianeconomy and markets.

d)There can be times where returns of Nifty/Sensex are going to behigher than that of S&P 500/Nasdaq 100. And this will have apsychological impact on you especially when many of your friendswould have invested in Indian markets and reaped higher returns forthat given period. Remember, diversification does not increasereturns rather it lowers the risk of losses on your investments.

Forany further queries or questions that you might have shall beanswered by our experts, who are committed to make your experiencewith Niyo Wealth a life changing one.

Weat Niyo are always there for you, opening local and internationalopportunities.Niyo Wealth is here for the best experience with your investment.