How to invest in US stocks after Sebi’s restrictions on overseas investment by mutual funds

The Association of Mutual Funds in India (AMFI) had recently asked asset management companies (AMCs) to stop accepting fresh lump sum and SIP investments in schemes that invest in overseas securities. As mandated by the Reserve Bank of India (RBI), Indian mutual funds registered with the Securities and Exchange Board of India (Sebi) are allowed to invest overseas with an overall cap of $7 billion. Investments in overseas exchange traded funds (ETFs) have a separate limit of $1 billion. At present, the $7-billion limit has almost been reached, hence the pause on fresh investments.

While Indian investors can directly invest in US stocks, as discussed below, the mutual fund route provides another avenue for the investors to invest in overseas companies and diversify their portfolios geographically. If you have been investing in overseas securities through the mutual fund route, this means that you can no longer make any fresh investments. However, you can continue with existing systematic investment plans (SIPs).

Investing in the US markets through mutual funds — the cost aspect: One also needs to remember that there are two types of mutual funds that invest overseas. There are fund of funds, which are local mutual funds that invest in international mutual funds, and there are local mutual funds that invest in international stocks. The expenses ratio for fund of funds tend to be higher, as apart from a general India fund management fee, there is also a management fee for the underlying fund. Even if you invest in a fund that is not a fund of funds, the expense ratio could be 2% or higher. However, there are other options for Indian investors to invest in overseas markets.

Other options to invest in US stock market
Even with the mutual funds route closed, you can still directly make investments in overseas markets through domestic platforms that allow you to invest in overseas markets, especially the US. As an Indian resident, the RBI allows you to remit up to $250,000 a year per person under the liberalised remittance scheme (LRS). When it comes to international markets, Indian investors have been showing a growing interest in the US stock markets. If you want to invest directly in the US markets, you can invest either in stocks or ETFs available on the US exchanges. In the case of stocks, fractional investment is allowed in the US. So, for highly priced stocks, you can invest in a fraction of the stock for as little as $1.

However, if you are a beginner, you may not have the expertise to pick the right stocks. Here is where ETFs come in. ETFs are like mutual funds because they are a collection of many stocks or bonds that are traded under one fund. But unlike a mutual fund, they are traded on the US stock exchanges with real-time pricing, just like a stock. Through an ETF, you can easily build a diversified portfolio. For example, instead of investing in 100 stocks, you can invest in the Invesco QQQ ETF, which is based on the Nasdaq 100 index. Further, since ETFs are passively managed, they have a lower expense ratio compared with actively managed mutual funds.

You can also get exposure to certain sectors like healthcare or energy by buying an ETF that tracks these sectors instead of buying separate stocks. Examples would include the iShares U.S. Healthcare ETF and the Alps Clean Energy ETF, which lets you get exposure to the healthcare and energy sectors, respectively. Further, Indians can also invest in theme-based ETFs, which, rather than investing in particular sectors, focus on emerging themes like cannabis or cloud computing or mobility. For example, the Global X Cloud Computing ETF invests in companies that seek to benefit from the increased adoption of cloud computing technology.

ETFs also let you invest in stock markets of other geographies like China or Japan. If you want to invest in technology companies in China, you can buy the Invesco China Technology ETF and invest in companies like Baidu Inc and Tencent Holdings Limited.

While the US markets remain volatile, Indians seem to be buying into the dip: The Nasdaq 100 saw a sell-off in January. Even with a two-day rally at the end of the month, it ended 8.5% down in January. Data from our platform shows that Indian investors bought into the dip and that they believe in the long-term growth prospects of the companies they are investing in.

The data also shows that compared to December, total net buying in January went up 1.8 times. Interestingly, all the top eight stocks bought on our platform in January — Tesla, Microsoft, Amazon, Apple, Netflix, Shopify, Meta and Nvdia — were tech stocks and consisted of 36% of January’s overall volumes. After the Meta Platforms’ stock dropped by 26% on February 3, Indian investors massively bought into it. While as of February 2, 2002, only $1,000 worth of Meta stocks were bought on the platform on a net basis, on February 3, that number went up 2,000 times, pointing to the fact that selling volumes were very high while buying volumes in the Meta stock were low.

As we can see, there is a strong appetite among Indian investors to invest in the overseas market. While the option to invest through direct stocks and ETFs are there, we are hopeful that the regulator will raise the limits — as it has done in the past — so that the route to invest through mutual funds also remains open and investors have plenty of options to diversify globally and build a sustainable portfolio for long-term wealth creation.

(The author, Viram Shah, is Co-founder & CEO, Vested Finance. Views are his own)

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