US Equity Mutual Funds- A Complete Guide

In recent years, many Indian investors have started turning towards foreign stock markets, especially in developed countries like the USA. Investing in the US market allows investors to diversify their portfolios internationally.

In this blog, we are aiming to cover the best mutual funds that invest in US stocks. These offer the benefit of geographic diversification and hedging against rupee depreciation.

What are US Equity Mutual Funds?

US equity funds are international mutual funds that invest most of their corpus on stocks of companies based in the USA. These companies have to be listed in the US stock market. 

International funds invest the pooled money into equities and equity instruments of companies listed in stock markets outside India. Many of the US equity focused mutual funds in India are funds of funds where a feeder fund invests in a master fund.

The returns that the investors receive will greatly depend on the market fluctuations in the USA. These funds, however, are considered a good investment choice if someone wants to diversify his/her portfolio in a market that has lower correlation to the Indian market.

Moreover, experts have also noticed that some of these stocks and schemes have performed very well and yielded high returns in the past. Therefore, if you decide to invest in US equity mutual funds, you will park your money under some of the biggest American companies. 

Furthermore, in most scenarios, these US funds are feeder funds where the fund invests the finances into a master fund located in the USA. These are an added layer on top of any ETF or underlying fund. 

Take the example of an AMC that pools money from investors and invests in an ABC company based in the USA. As this company has no presence on the Indian stock exchange, the AMC pools funds to eliminate risks of direct exposure to the US stock market.

Also Read: Equity Mutual Funds: Definition, Types, Benefits, Returns & Taxation Policy

List of Top Performing US Equity Mutual Funds in India

If you are interested in investing in US stocks mutual funds in India, then we have curated a list of the top 10 funds based on their past performance.

Types of International Mutual Funds Investing in US Equities 

Mutual funds which invest in US stocks are a subset of international mutual funds. So below are the various types of international mutual funds: :

1. Global funds

Global and international funds may sound the same, but they differ. In global funds, investors’ money will be invested in stocks listed anywhere around the world, including in their domestic country. However, with international funds, the corpus is invested in all the other countries except for the investors’ residing country. 

2. Global sector funds

Here the fund invests the corpus only in a particular sector worldwide. So it can be any sector such as mining, agriculture, etc. This will allow investors to take the focused exposure to any particular sector.

3. Regional funds

This type of fund invests money in businesses from a certain geographic area anywhere in the world. Investors who are well-versed in a particular geography can concentrate on purchasing several regional funds rather than global ones.

4. Country funds 

This type of international fund invests in businesses that are based in a single foreign country. This makes it possible for an investor to make profits from the markets of other nations. For example, a US country fund is an investment which allows you to take exposure to US stocks and securities.

Also Read: Best International Mutual Funds in India to Invest in 2022

Benefits of Investing in Mutual Funds with US Stocks

Below are a few benefits you will receive as an investor if you invest in US equity mutual funds:

• Diversification- When you invest in international mutual funds, you are essentially looking to diversify your portfolio globally. Investing in US-based stocks via mutual funds will enable investors to safeguard his/her portfolio from risks in the Indian stock market. Moreover, investors get to take advantage of the market cycles from other countries. In this case, it will be the US market. 

• Cost-effective- As an investor, if you choose the appropriately valued portfolio, then you will be able to make your investments cost-effective. Furthermore, you will also be able to align your investments to match your financial goals, like accumulating money for your retirement or children’s wedding. 

• Portfolio management- When you invest in a mutual fund, you will get a fund manager’s assistance in managing your money. Fund managers will make informed decisions related to the market conditions and invest accordingly. This could be extremely helpful when investing in markets outside your country. 

Also Read: Top Performing Equity Mutual Funds in India in 2022

Risks of Investing in US Equity Mutual Funds

Investing in US stocks mutual funds in India is accompanied by certain risks, and they are:

• Exchange rate risks- When you invest in US equity mutual funds, you are exposed to risk of fluctuations in the foreign exchange rate. This can impact your portfolio returns negatively.

• Foreign market risks- Investors are exposed to foreign market risks when they invest in US-based funds. That is why experts suggest investors keep an eye on the country’s social, political and economic outlook because these will affect the market conditions.

• Concentration risks- If you invest in mutual funds focused on specific sectors like mining or agriculture, they will carry certain sector-specific risks. For example, if you invest in US-based mutual funds for mining and the entire industry is not doing well, your returns can go down considerably.

Who should Invest in US Equity Mutual Funds?

The following kinds of investors can choose to invest in US equity mutual funds:

• Investors with a desire to venture into the USA investment landscape. 
• People who want to create a hedge against the depreciation of the Indian Rupee. 
• Investors with a long-term investment horizon and a high risk-taking capacity.
• Investors who want geographical diversification with equity instruments in the US economy.
• Investors who want to invest in stocks of big US companies like Facebook, Netflix, Google, Microsoft, Amazon, etc.

Also Read: Investment vs Trading: A Comparative Guide

Things to Consider Before Investing in US Equity Funds

Here are a few things you should consider before you invest in US-focused mutual funds:

• Risks involved- Even if you invest in top-performing funds investing in the top companies, your investments are not free of market-related risks. For example, companies whose stocks have performed well in the past may stop doing well due to various economic or political factors. That is why as an investor, you must thoroughly understand the economic outlook along with all the rules and regulations of the US market.

• Fund manager’s role- When you invest in any mutual fund, a fund manager will take the responsibility of managing the investments on your behalf. You should research the past record of the fund house and the fund manager before entrusting your money to them. Check whether they have any experience in handling international mutual funds. If yes, then examine how well those funds are performing. 

• Expense ratio: Ensure to consider the expense ratio because this will determine the kind of returns you will receive in hand. The expense ratio is the amount the fund houses charge for managing your funds on your behalf.

Taxability of US Equity Funds

Capital gains from US equity mutual funds are taxed in the following manner in India:

• Short-Term Capital Gains- If you redeem your funds before three years, the gains you receive will be added to your taxable income and will be subject to income tax as per your applicable tax slab rate. 
• Long-Term Capital Gains- As per the finance bill 2023, if the International mutual fund is holding less than 35% exposure to Indian or domestic equities, the long-term capital gain will also be applicable at the slab rate.

Final Word

India investors are keen on investing in the US stock market because the US stock indices, the Dow Jones (DJI) and NASDAQ (IXIC), have given excellent returns in the last few years. Thus, mutual funds that invest in US stocks are capable of yielding high returns. 

You can try your luck at investing in this international market because there are many US-based companies whose stocks are performing very well currently. However, take your decisions after thoroughly understanding the market and how these funds work. 

Frequently Asked Questions