You can now invest in and own a bit of the big Foreign companies like Google and Apple from the comfort of your home! Niyo Wealth offers investments in international mutual funds on your Niyo app. 

Q. For several years I have been looking for some exposure to the US financial markets. Yesterday, I learned about Motilal Oswal’s S&P 500 index fund. I was wondering if it is available on Niyo Wealth
I also welcome any thoughts/opinions you might want to share about exposure to the US markets through Niyo Wealth, are there any caveats I 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

• Active mutual funds investing in both Indian and US equities.
• US-focused active mutual funds
• US-focused Index funds
• Which option to choose?
• Nasdaq 100 or S&P 500 the difference?
• Caveats for Motilal Oswal S&P 500
• Factors to keep in mind while investing in international funds

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

1.Active funds investing in both Indian and US equities

The most popular example is Parag Parikh Long Term Equity Fund which invests up to 35% of the total investment in international equities (predominantly US) while keeping 65% or more in Indian equities. This allows the fund to be classified as an equity fund for taxation purposes otherwise, international funds are classified as debt for taxation purposes, while giving you a decent exposure to US stocks. This is a big tax advantage!

However, for international investments, this fund takes very concentrated positions in a handful of stocks instead of a broadly diversified portfolio like the S&P 500.

2. US-focused active mutual funds

These mutual funds either invest in US stock markets directly (e.g. Franklin India Feeder, ICICI Prudential, US Bluechip Equity Fund) or these can be classified as fund of funds (FOFs) that invest in a US-based active equity mutual fund.

3. US focused Index mutual funds

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

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

Which option to choose?

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

Why an index fund?

The US financial markets are considerably more mature and efficient than Indian stock markets so it is very difficult for active fund managers to beat a diversified benchmark like the S&P 500.

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

Given this context, it is better to invest in an index fund that doesn’t warrant trying to identify a small group of active funds that will outperform and then keep changing them as their performance wanes.

Also, the expense ratio of index funds is much lower as compared to their active counterparts e.g. the all-in expense ratio of Motilal Oswal Nasdaq 100 FOF’s direct plan is just 0.6% (FOF + underlying ETF) as compared to Parag Parikh Long Term Equity Fund with 1.13%

Similarly, the expense ratio of the Motilal Oswal S&P 500 index fund is 0.5%. On the other hand, the expense ratio of ICICI Prudential US Bluechip Equity Fund is 1.79% – almost 3 times higher!

The Nasdaq 100 Index is a basket of the 100 largest, most actively traded US companies listed on the Nasdaq stock exchange. The index includes companies from various industries except for the financial industry (e.g. commercial and investment banks). These non-financial sectors include retail, biotechnology, industrial, technology, health care and others. The technology sector accounts for 54% of the index’s weight, followed by consumer services at about 25%. (Investopedia).

On the other hand, the S&P 500 is an index of the 500 largest US publicly traded companies. The index is widely regarded as the best gauge of large-cap US equities. It is a more diversified index as compared to Nasdaq 100. Technology being the bigg est sector still accounts for only about 25% (54% in Nasdaq), followed by healthcare (15%) and the financial industry (10%).

Caveats for Motilal Oswal S&P 500

The usual caveats of investing in a new index fund apply – mainly that the tracking error is unknown.

What is a tracking error?

Tracking error can be explained as the deviation of the index fund returns from that of the index itself. Running an index fund especially an overseas fund requires a good deal of operational expertise which derives a negligible tracking error.

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

Factors to keep in mind while investing in international funds

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

b) International exposure is a good way to diversify but diversification does not always lead to higher returns. Diversification can be a tool to reap average returns with reduced risk as the investments in different markets are expected to move somewhat differently. In other words, diversification can mean, to settle for an average return on the investment by giving up on both the best and the worst case scenarios.

c) In the future, returns from US markets could be lower than that from India. Or the other way round. No one really knows. So, you shouldn’t invest thinking you will get definitely higher returns vs investing in India. That’s just what has happened in the last decade or so. The future can be different. Do it only to reduce your portfolio’s over-dependence on the Indian economy and markets.

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

For any further queries or questions that you might have shall be answered by our experts, who are committed to make your experience with Niyo Wealth a life changing one. 

We at Niyo are always there for you, opening local and international opportunities. Niyo Wealth is here for the best experience with your investment.