Home
>
Articles
>
Investing directly in US Stocks and ETFs via INDmoney vs via Indian Mutual Funds

Investing directly in US Stocks and ETFs via INDmoney vs via Indian Mutual Funds

Last updated: 07 Sep, 2021 | 04:44 pm

Investing directly in US Stocks and ETFs via INDmoney vs via Indian Mutual Funds

There was a time when Indian investors had to struggle to invest in the US equity market. Times have changed, and now investors can invest in US equity through mutual funds or directly buy stocks. In this report, we have tried to analyse the difference between investing directly in US stocks versus buying US stocks through mutual funds.

For this comparison, basis we have taken some of the best Indian Mutual Funds investing in US markets namely: 

  • DSP US Flexible Equity  (Direct Plan)
  • Nippon India US Equity Opportunities Fund (Direct Plan)
  • ICICI Prudential US BlueChip Fund (Direct Plan) 

For directly investing into US markets we have considered:

  • Russell 1000 Growth ETF
  • FAANG (equally-weighted) 

Invest in US stocks: Analysis

  • As the graph shows, Russell 1000 has outperformed Indian MFs (Category Average). It indicated that investing directly into US markets through ETFs route can fetch you higher returns in the long run.

Let’s look at what would happen if you invest Rs 10 lakh in some leading international Mutual Funds vs investing in FAANG and ETF.  

Post-tax and post expenses returns assuming an initial investment of Rs 10 lakh

  • The FAANG basket of stocks has outperformed all other mutual funds over the 5-year period on a pre-tax as well as post-tax basis
  • On the pre-tax basis the fund returns vary between 18-20% CAGR of the five year period. Over the same period, FAANG stocks have delivered annualised returns of 37% and US ETF Russell 1000 has given returns of 25.7%. 
  • On a Post tax post expenses basis, FAANG and Russell 1000 have outperformed by giving returns of 32.3% and 21.5% respectively against 16-18% returns in Indian MFs.

Expenses incurred while investing through international Mutual Funds vs US ETFs and US stocks (based on Expense ratios)

While at first sight the expense ratio of 1.3%-1.63% may seem insignificant, they can impact your returns over a long-term time horizon. The infographic below shows how much of your returns are eaten up the the massive expense ratios charged by Indian mutual funds investing in US:

The expense ratio of just 1.3% can cost you around 1.34 lakh when compounded for 5 years. But if we compare that to directly investing via the ETF route we have to pay as less as Rs 9,769 for 5 Years and no expense cost for buying direct US equity. 

Impact of Taxation on returns

  • The taxation for mutual funds qualify for a lower tax rate of 20% with indexation benefit. The same is applicable for the stock portfolio as well. 
  • Based on the latest cost inflation index, an indexation factor of (317/ 254) has been used to calculate the indexed cost of acquisition as Rs 12.50 lakh.
  • On this, the lower taxation rate of 20.8% is applied to calculate the post-tax returns.
  • As the returns increase, benefits of indexation reduce, as indicated by higher tax rates for Vanguard Russell 1000 Growth.

The additional expenses for investing directly in US Stocks via INDmoney  (Currency Conversion & Withdrawal)

  • While putting in the initial Rs 10 lakh, there would be a currency conversion charge of 0.5%. This is much lower than what other banks charge. 
  • INDmoney’s 2-in-1 account has completely done away with Brokerage and Fund Transfer charges. Other banks usually charge a Remittance fee of up to Rs 3,000. 
  • While withdrawing the money, there would be an additional charge of $20 (assuming you take just one transaction to withdraw Rs 10 lakh out). This $20 is applicable per transaction.
  • Lastly, there would be a currency conversion charge of 0.5% (this can vary depending on the bank used). 

Conclusion

  • Investing in US equities through ETFs such as Russell 1000 has outperformed almost all the Indian mutual funds investing in US equities. This is mainly due to the lower expense ratio of the ETFs.
  • INDmoney latest 2-in-1 Super Saver Account helps to you reduce expenses while investing in the US market, and hence, 
  • In case the investor would have chosen to invest using an equal-weighted portfolio of FAANG, the outperformance is even more pronounced.
  • Investing in US stocks directly through INDmoney translates to much lower expenses and potentially higher returns over the long-term horizon.



We are a SEBI registered investement advisor