US elections: With 38% returns YTD, US-focused Indian mutual funds offer better geographical diversification

Following an impressive performance in 2023, domestic mutual funds that invest predominantly in the US equity market have continued to deliver better returns in 2024. Year-to-date (YTD), the 20 schemes in the US-focused funds category have delivered an average return of 24 percent.

The top performing schemes—Mirae Asset NYSE FANG+ETF Fund of Funds (FoF), Mirae Asset S&P 500 Top 50 ETF (exchange-traded fund) FoF and Bandhan US Equity FoF delivered an absolute return of 38 percent, 35 percent and 31 percent, respectively, during the period.

Meanwhile, the domestic mutual fund categories—large-, mid- and small-cap funds—delivered 16 percent, 26 percent and 25 percent, respectively, over the same period.

‘Magnificent 7’ drives the growth

Over the last two years, US equities delivered better returns compared to the domestic market. Nikhil Behl, co-founder INDmoney and CEO Stocks, said, “This growth has been largely driven by the ‘Magnificent 7’—Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla—backed by strong earnings and major investments in artificial intelligence (AI). These companies have integrated AI into their offerings, boosting efficiency and opening up new revenue streams.”

Also read: Nasdaq, Nasdaq Next, FANG, S&P 500, Total Market and Value: How to get the best out of US focused MFs?

The term Magnificent Seven was coined for these stocks by Michael Hartnett, chief investment strategist, BofA Global Research, in May 2023.

“In 2024, the US market has become much more balanced,” said Pratik Oswal, head of passive funds at Motilal Oswal Asset Management Company. The 450-490 companies that had not performed well last year have also recovered in 2024 and demonstrated better returns, he added.

Macroeconomic factors such as the US Federal Reserve’s policy rate cut rate and the likelihood of more in the offing, and the easing of the rate of inflation have been favourable factors, leading to a resurgence in US stocks, he said.

Also see: Worried about market turbulence? Here are top-performing aggressive hybrid funds to ride out the volatility

The US market provides better diversification to Indian investors as the domestic market has one of the lowest correlations with the S&P 500. Secondly, the US provides exposure to broader megatrends (eg, AI, biotech, cloud, aerospace) that are still largely under-represented in India. It also helps manage currency fluctuations that can impact investments.

MFs vs LRS

In February 2022, the Securities and Exchange Board of India (SEBI) notified $7 billion as the cap for mutual funds to invest in overseas securities and funds, and a separate limit of $1 billion for investing in overseas ETFs. For more than two years now, the Reserve Bank of India hasn’t increased this limit. However, this can change at any time.

Many US-focused funds have stopped accepting fresh subscriptions. However, a few like Edelweiss US Technology Equity FoF and Edelweiss US Value Equity Offshore Fund accept both lump-sum and systematic investment plan (SIP) payments, while Motilal Oswal Nasdaq 100 ETF, Motilal Oswal NASDAQ Q 50 ETF, Motilal Oswal S&P 500 Index Fund and Motilal Oswal Nasdaq 100 FoF accept only SIP subscription.

Also see: How Step-up SIP in mid-cap funds helps to achieve larger corpus and higher returns than a normal SIP

Apart from mutual funds, Indian investors have another avenue to invest in the US market—the Liberalised Remittance Scheme (LRS).

One of the ways to invest in the US market while taking advantage of the benefits that the LRS offers is to open an overseas trading account with a foreign broker that has a presence in India, or with a domestic broker that has a tie-up with an American broking firm.

Should you invest in US stocks now?

To ensure diversification, experts advise an allocation of 5-10 percent of your portfolio to the US market at any point of time, given the long-term growth potential and an exposure to new technologies.

Niranjan Avasthi, senior vice president  and head, product, marketing and digital at Edelweiss Mutual Fund, said, “Indian investors should view US tech stocks as a long-term play, especially in areas like AI and cloud infrastructure, which are still in the early stages of a potentially decade-long growth cycle.”

While the near-term challenges and consolidations are expected, companies pioneering new age tech have a significant runway for growth and innovation. This space is experiencing a platform shift that could fuel technological advancements across sectors Avasthi adds.

Also see: Wealth managers are recommending multi-asset funds amid volatility in equities

“We have a very positive outlook on US stocks over the next two to five years considering the favourable macro environment,” said Oswal, adding that the trend of broad-based growth is expected to continue.

“Given that the US markets are expensive currently, investing via the SIP route either in US index funds like the S&P 500 and NASDAQ 100 would be ideal,” said Rushabh Desai, founder of Rupee With Rushabh Investment Services.

Also see: Top Mid-cap stocks that fund houses sold ahead of volatility