Investing in US equities makes a lot of sense for goals where the goal amount is likely to be in dollars. The biggest such need, in most cases, is educating your child in a renowned US university.
While International Fund of Funds do provide an easy way for Indians to invest in US equities, many of you may be wondering if it’s actually worth it in the first place. Won’t investing in Indian equity mutual funds be enough?
There are primarily two reasons why investing in the S&P 500 is worth your while.
#1. Pure performance
The S&P 500 is one of the most commonly referred to index in the US and is representative of US stock market performance on average, just as the BSE Sensex or Nifty is in India. Now let’s see what the comparative numbers say.
From a purely performance perspective, S&P 500 returns are 8.2% per annum, for the 38 year period since 1980. If we convert S&P 500 to INR, it has given 14.6% per annum return, compared with 15.5% return by the Sensex over the same period.
15.5% per annum is an inflation beating rate of return that by itself makes a case for investing in the S&P 500 if your goal timelines are in excess of 7 years. In addition, the returns over a long period have been comparable.
Even if you take individual 20-year periods, the performance of S&P 500 and Sensex, after adjusting for the currency factor, is comparable.
#2. Having two tools is better than having just one
When planning for goals where the required amount is large (in the crores), it pays to have your eggs in different baskets. Investing in US equities allows you to invest in another geography and market altogether. The US economy has different factors affecting it and thus insulating it somewhat from factors that affect India. One might say that Indian equities and US equities are “uncorrelated”.
A part of your portfolio invested in US equities, therefore, remains somewhat protected from events that might bring Indian markets down. The resultant diversification can help you reach your goal far more reliably than if you were to invest in only one market.
Does it make sense for everyone?
Investing in foreign markets is not without its set of risks which are in addition to the standard fluctuations equity as an asset class faces. Economic turmoil and short term events constantly cause volatility in markets. Since 1980s, several such events have occurred.
Despite the risks, however, this approach is significantly more practical when saving for large and specific goals which require a significant corpus in dollars. As a consequence, US equities via International fund of funds are a smart, and perhaps essential, addition to a portfolio that aims to achieve such goals.