Analysts expect the US economy to grow between 2% and 3% in the next couple of years. As the US economy shows a healthy growth, experts see the Fed hiking rates at every other meeting through June next year. This means the US stock markets are expected to do well, while markets like India may see the return of foreign capital to the US.
So here is one strategy one can follow in this scenario. There are many international mutual fund schemes that can allow you to ride the US economy up-move. This allows you to have geographical diversification especially in cases like the ongoing emerging markets rout.
While the common argument for investing in international funds is a strong dollar and weak rupee, the underlying theme must be strong. With US economy now showing some promise, we look at a few US funds that can be on your plate. Read on.
Why US equity funds
The US equity market is the largest in the world. US equities are a core component of almost every major global equity or sector portfolio/index. And they deserve a place in your portfolio too if you are okay with the risks. On average, US equities represent close to 50% of global equity indices. US technology, healthcare, consumer discretionary, consumer staples, utilities, and industrials sectors are promising sectors.
Franklin India Feeder Franklin US Opportunities Fund
Fund managers – Srikesh Karunakaran Nair, Grant Bowers & Sara Araghi
Exit load – 1% if redeemed/switched-out within three years of allotment
It has a size of Rs 575 crore. The fund was launched in 2012. So, it has a track record of six years. The fund is benchmarked to the Russell 3000 Growth. It has shown consistent performance, though it must be remembered that international funds are high risk. It has a one-year gain of over 36%. Over three and five-year periods, the Franklin India Feeder Franklin US Opportunities Fund has given 14% CAGR. While current performance has been good, international funds do undergo periods of volatility. This scheme has lost over 18% in its worst quarter and even 12% in one single month. The fund’s assets are invested in units of Franklin U.S. Opportunities Fund, an overseas equity fund. The ideal investment horizon should be five years or more.
DSP US Flexible Equity Fund
Fund managers – Laukik Bagwe, Kedar Karnik and Jay Kothari
Exit load – 1% If redeemed between 0 – 12 Months
It has a size of Rs 221 crore. This fund too was launched in 2012. The fund is benchmarked to the Russell 1000 index. Thanks to recent performance, the scheme’s returns across various time-periods looks very impressive. Year to date, the DSP US Flexible Equity Fund has generated over 21%. In last 12 months, the fund has given more than 30%. Its three-year return is 13.7% and five-year return is more than 13%. The fund’s money is invested predominantly in units of BlackRock Global Funds US Flexible Equity Fund (BGF – USFEF). The expense ratio is one of the highest, though.
ICICI Prudential US Bluechip Equity Fund
Fund managers – US Portion Priyanka Khandelwal & India debt portion Rohan Maru
Exit load – Up to 3 months (including the last day of the third month) from the date of allotment is 3%. More than 3 months but before 1 Year (including the last day of a year) from the date of allotment is 1% of the applicable NAV
It has a size of Rs 202 crore. The fund was launched in Jul-2012. The expense ratio is slightly higher than peers. Nearly 30% return in the last 12 months. The fund directly invests in US equities. It’s benchmarked against S&P 500 index. Top holdings include Amazon. com, Comcast Corporation, Microchip Technology, Allergan, CVS Health Corporation, McDonald’s, Philip Morris International, Delta Airlines, Amerisource Bergen Corp and Skechers.
Fund of fund taxation
Do note that most of the international equity funds available in India are fund of funds (FoF). This means the money collected from Indian investors are invested in the core overseas fund. FoFs, even if they invest in equities, are treated like debt MFs for taxation.
So, long-term capital gains (LTCG) tax is 20% (plus surcharge, if applicable and cess) with indexation if units are held for more than 36 months. Short-term capital gains (STCG) are taxed at the income tax slab rate if units are held for less than 36 months. Do note that the investor does not pay any tax on dividends but a dividend distribution tax (DDT) is deducted at source at 29.12% ( 25% + 12% surcharge + 4% Health & education cess) for individuals and at 34.944% ( 30% + 12% surcharge + 4% Health & education cess) for any other person. The DDT is paid by the mutual fund after grossing-up income distributed to the investor.