Investing in abroad markets has become quite easy these days. One can get direct and indirect exposure into the U.S. market through various methods. Investing in foreign markets like the U.S provides many benefits like Diversification into the top companies of the world, Benefit of Currency Depreciation, etc. Apart from directly purchasing the stocks listed on the U.S. stock exchanges, there are some different methods as well. Know the best methods of getting exposure to the U.S. stock markets.
Getting exposure in Foreign markets is a good idea for diversification. Diversification of assets reduces the risk of concentration or too much exposure in a single asset class. Getting exposure in U.S markets is a good idea as it gives access to the biggest market of all markets, in terms of Market Capitalization.
Advantages of getting Exposure to the U.S Markets
When an investor invests in the U.S markets from India, they don’t merely get the benefit of getting exposure in the top companies of the world. They also get some indirect benefits, Some of which are.
As we all know the Rupee always depreciates against the Dollar in the long run. Therefore apart from Capital gains, one will also gain from the Currency which is the Dollar. Investing in domestic markets doesn’t offer this benefit. Whereas while investing abroad one generates profits out of the domestic currency depreciation.
By buying into U.S securities one can get diversified to a broad variety of shares that are not listed in the Indian market. For example stocks like Google, Facebook, Amazon, Tesla, etc. These stocks are world leaders and we use their products in routine life. Hence owning them comes with security as they are giants in their respective fields.
Having 100% allocation into one country can include certain risks. In the incident of a country-specific crisis, the performance of the portfolio will be subdued whereas the U.S markets will not be affected by our local events.
India is a developing economy hence the local rate of growth is higher compared to some of the developed economies. In a similar way, some companies abroad ordinarily have more growth potential than the domestic markets. Due to this investing abroad provides the opportunity to invest in companies with much higher growth potential.
Getting exposure in U.S markets is not so difficult as one thinks. There are mainly 3 ways one can get exposure to the U.S market. They are-
1. Investing through Active International Funds
Active international Funds are funds that collect money from individual investors and buy and sell stocks from the U.S markets. Their main objective is to generate the maximum returns. The proportion of these funds change frequently as per the wish of the fund manager. A dedicated Fund manager is assigned for such funds who look after the performance. These funds charge a relatively higher expense ratio as the fund has to do a lot of buying and selling. The fee of researchers who find out undervalued stocks is also included in this. Some examples of an Active fund are- Nippon India US Equity Opportunities Fund, ICICI Prudential US Bluechip Equity, etc.
2. Investing through FOF (Funds Of Funds)
As the name suggests Funds Of Funds are funds or Mutual Funds which invest in other Funds that are located abroad. In simple terms, these funds invest in U.S mutual funds and provide the returns from them. These funds can buy Funds of other Foreign Funds, Hedge Funds, etc. The Expense ratio of these Funds is greater than regular Mutual Funds as the cost of international transactions is higher. An example of such a fund is “Franklin India Feeder-Franklin U.S. Opportunities Fund-Direct-Growth”.
3. Investing through Passive International Funds
Passive International Funds are funds that passively invest and track an international Index such as Nasdaq 100. They are not managed by a manager who actively buys or sells securities. Due to this reason, the Expense ratio of passive funds is comparatively lower than active funds or FOFs. In this way, the investor will get the returns of the Index which can be sometimes less than that of an Active Fund. There are 2 Passive Investing Funds for the U.S markets, they are Motilal Oswal NASDAQ 100 WTF and Motilal Oswal S&P 500 Index Fund Growth.
To conclude investing in the U.S markets is good for the purpose of diversification. One must weigh their risk profile as the risks involved are high while investing in abroad markets. An investor should also identify their preferences. If one wants greater exposure in specific sectors or stocks then an Active Fund is suitable or else a Passive Fund will provide all the benefits of U.S exposure.
Investors who are willing to diversify their U.S portfolio into broader categories can look at Passive Funds. Passive funds like the Nasdaq 100 fund gives the investor, exposure to the top 100 companies in the Nasdaq 100.
I believe that the investments play a major role in the financial planning by the individual and diversification is vital in that. Nowadays, people have a lot of idea about the foreign stocks and, know when, where, and how much to invest. As investing in US stocks is quite easy nowadays, people have started to prefer doing so. According to the LRS, an individual can invest up to $250,000 USD every year.
Investing in the US stock market really gives you a lot of plus points. But then keep in mind the higher tax ratio, higher losses of about 7 times, and other such factors. But then there are several brokers from ICICI, HDFC that do offer brokerage services in the US stock market. Another way is through mutual funds with a comparable yet higher expense ratio.