As Indian equity markets grapple with stiff valuations, investors are increasingly exploring international opportunities, particularly in the United States.
Wall Street’s recent strong performance, led by technology stocks, has made US equity mutual funds a viable diversification strategy.
According to a report by The Economic Times, financial planners are recommending investors to allocate 5-10% of their equity portfolios to US markets, staggering investments over the next year to mitigate risks from the sharp run-up in valuations.
Indian vs US equities: a valuation snapshot
At present, the S&P 500 trades at a price-to-earnings (PE) ratio of 25.41, slightly lower than the Nifty 500’s 26.5.
Vishal Dhawan, founder of Plan Ahead Wealth Advisors, notes in the report,
At the broad index level, valuations of Indian and US equities are similar. Several US companies are expected to show strong growth.
Dhawan advocates systematic investment plans (SIPs) in funds like Franklin US Opportunities Fund for those with a higher risk tolerance.
Some diversified and sectoral equity mutual fund schemes have a provision to allocate up to 35% to overseas equities.
Schemes like PPFAS Flexicap Fund have a mandate to invest in global companies.
Indian and US markets together exposes an investor to 30% of global GDP
The US accounts for approximately 25% of global GDP and hosts unique businesses in emerging sectors, making it an attractive destination for Indian investors.
A note from Motilal Oswal (NS:MOFS) Mutual Fund highlights that combining investments in the US and Indian markets provides exposure to 30% of global GDP.
Additionally, the low correlation between US and Indian markets helps reduce portfolio volatility, enhancing risk-adjusted returns.
Over the past year, the S&P 500 surged 37%, outpacing the Nifty 500’s 25.29% gain.
“The US markets are up sharply, led by technology stocks in the last one year, but the move ahead is not going to be one-sided,” said Vineet Nanda, founder, SIFT capital.
Nanda believes investors could stagger investments and use a buy on dips approach.
However, wealth managers caution against over-allocating to the US.
Feroze Azeez, deputy CEO of Anand Rathi Wealth (BO:ANAA), warns, “The US market faces geopolitical risks, inflationary pressures, and Federal Reserve policy uncertainties.”
Investors should maintain a strong domestic equity position while considering small allocations to US equities.
Regulations limit options for US equity investments
Despite the appeal, Indian investors face limited options for US equity investments, distributors say.
This is because the Reserve Bank of India (RBI) enforces a cap of $7 billion for mutual funds and an additional $1 billion for exchange-traded funds (ETFs).
This restriction limits the availability of funds focusing on mid- and small-cap US stocks or sectors outside technology.
Many fund houses have halted new investments due to these limits.
For those keen on US exposure, options include large-cap-focused funds or Nasdaq 100 ETFs, which are heavily weighted towards technology.
Furthermore, international funds enjoy favourable tax treatment, with a long-term capital gains tax of 12.5% after a two-year holding period.