How to Invest in US Mutual Funds from India?

The United States (US) has always attracted Indians for its vibrant culture, iconic pop figures, movies, and career opportunities. In today's interconnected world, experiencing these facets no longer requires a visit to the US. Just as over-the-top (OTT) platforms provide easy access to American films, international mutual funds offer avenues to participate in its dynamic market.

Let's explore how to invest in US stocks through overseas mutual funds.

What is an international mutual fund, and how does it allow you to invest in US stocks?

An international mutual fund is a type of mutual fund that invests in stocks, bonds, and other securities of companies located outside of India. Like other mutual funds, international funds pool money from multiple investors and invest it in various assets. These funds are actively managed by fund managers who make crucial investment decisions based on the fund's objectives and strategies.

If you want to invest specifically in the US market, you can choose an international mutual fund that focuses on investing in US companies. Through these funds, you can gain exposure to the US economy and potentially benefit from it.

Sounds interesting? Let's find out how you can invest in these funds.

How do you invest in foreign mutual funds?

• Research suitable funds: Whether investing in Indian mutual funds or international ones, thorough research is essential. Given the volatility that comes with investing in a foreign market, it is crucial to look for funds that offer diversity and align with your investment goals.
• Consider Systematic Investment Plans (SIPs) or lump sum investments: SIPs allow you to invest regularly, while lump sum investments involve investing a larger amount at once. SIPs are convenient and can be easier on your budget, while lump sum investments are useful if you have idle funds ready to invest.
• Complete Know Your Client (KYC) with the Asset Management Company (AMC): KYC formalities involve submitting personal details, contact information, and bank statements as required by regulatory authorities. This is a mandatory step to complete compliance regulations.

Benefits and risks of investing in international mutual funds

Benefits

• Diversification: Investing in international mutual funds enables you to spread your investments across different geographies and markets. This helps lower the overall risk in your investment portfolio by exposing you to multiple markets.
• Convenience: International mutual funds enable you to leverage the expertise of fund managers who specialise in investing in markets like the US. This makes it easier for both seasoned and novice investors to invest in a foreign economy.
• Exposure to leading stocks: Investing in US-focused mutual funds allows you to gain exposure to some of the world's most renowned companies and leading stocks, which may not be available in the Indian market.

Risks

• Currency risk: Returns on US investments can be affected by instabilities in exchange rates between the Indian Rupee (₹) and the US Dollar ($). These exchange rate movements can impact the value of your investments both positively and negatively.  
• Political risk: Investing in a foreign country exposes you to political risks present in that region. Any changes in government policies, tax laws, and regulatory changes can impact the return on your investment.

Along with the benefits and risks, you must also know how these funds are taxed.

How are international mutual funds taxed?

After the Union Budget 2024 was announced on July 23, 2024, the taxation rules for international mutual funds have been updated as follows:

1. For investments made before April 1, 2023:
• If these investments were redeemed between April 1, 2024, and July 22, 2024, the tax treatment will depend on the holding period. Gains from investments held for less than 36 months will be taxed as Short-Term Capital Gains (STCG) at the applicable tax slab rate. Gains from investments held for more than 36 months will be taxed as Long-Term Capital Gains (LTCG) at a rate of 20% with indexation.
• For investments redeemed on or after July 23, 2024, the tax treatment will again depend on the holding period. Profits from investments held for less than 24 months will be taxed as STCG at the applicable tax slab rate, while those from investments held for more than 24 months will be taxed as LTCG at a rate of 12.5%.
2. For investments made after April 1, 2023:
• If these investments were redeemed between April 1, 2024, and July 22, 2024, the profits will be taxed at the slab rate, regardless of the holding period.
• For investments redeemed between July 22, 2024, and March 31, 2025, the tax will be applied at the slab rate, irrespective of the holding period.
• For investments redeemed on or after April 1, 2025, the tax treatment will depend on the holding period. Profits from investments held for less than 24 months will be taxed as STCG at the applicable slab rate, while those from investments held for more than 24 months will be taxed as LTCG at a rate of 12.5%.

Conclusion

Geographical diversification can offer benefits such as distributed risk and enhanced returns. However, it is also important to be aware of the associated risks. International mutual funds can be a convenient way to gain exposure to foreign markets like the US. As long as you understand the pros and cons, you can proceed with investing.

An investor education initiative by Edelweiss Mutual Fund

All Mutual Fund Investors have to go through a one-time KYC process. Investors should deal only with Registered Mutual Fund (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit - https://www.edelweissmf.com/kyc-norms  

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