WHY INVEST IN THE US?
The US has the world's largest equity market. At $23 trillion, its market cap accounts for 36% of global market capitalisation. A quarter of the Fortune 500 companies have their headquarters in the US. Indian investors can also get exposure to unique investment themes, such as aerospace, semiconductor, consumer technologies, e-commerce, etc, not available in the domestic market. Also, the correlation between the CNX Nifty and the S&P 500 Index has been very low--0.29 over the past 10 years.
The low correlation between the Indian and the US equity markets results in more effective diversification of the Indian investor's portfolio.
Having exposure to both the markets lowers your portfolio volatility . For instance, if you had invested in the Sensex, your standard deviation--a measure of volatility--over the past 10 years would have been 25.65%. But if you had constructed a portfolio with 80% weight in the Sensex and 20% in the S&P 500 Index, the standard deviation would have been just 17.74%.
The likelihood of rupee depreciating against the dollar is another reason to invest in the US market. Many Indians will have dollar-based liabilities in the future with children's education or travel plans. Being invested in dollarbased assets will protect your portfolio.
If you are building your international portfolio country-wise, and not via a diversified international fund, then the US market should be your top priority .
DRAWBACKS AND RISKS
After several years of outperformance, valuation in the market is no longer cheap. Even if corporate profit margins do not revert to their historical mean, the current valuation levels appear stretched.
Currency movements also pose risks.The strengthening of the dollar against many of the world's currencies could affect corporate earnings in the US as almost 40% of the sales of S&P 500 companies are from abroad. Also, since all the US-focused funds have more than 65% of their portfolio invested in foreign funds or shares, they will be treated at par with debt funds for ax purposes in India. Which means you'll need to stay invested for at least hree years to avail of long-term capital gains benefit.
WHAT SHOULD YOU DO?
Despite the markets' elevated valuations, Indian investors should have some exposure to US funds in their long-term portfolios.
Investors should invest via SIPs and have at least a five-year horizon to overcome the risk arising from high valuation. Allocate 5-10% of your equity portfolio to these funds.
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