Is it a good idea to diversify your portfolio beyond India to US stocks?

One of the risks with investments is a country-specific risk. You can mitigate this risk by diversifying your portfolio beyond India to include US stocks.

Do you need international exposure to US stocks along with domestic equity?

The US stock markets have done very well in the last 5 years. In fact, the US stock markets (Russell 1000 Growth Index: 26% CAGR) have given better returns than Indian stock markets (Nifty 50: 13% CAGR) as of 30 June 2021. Naturally, many investors wonder: Is it wise to invest in US stocks from India? 

The answer is a definitive ‘Yes’. Apart from superior returns, investing in US stocks gives investors various other benefits such as international diversification, rupee depreciation benefit, low correlation with Indian markets, etc. This article discusses all the benefits of investing in US stocks.

1) Opportunity to earn superior returns

In the last few years, the US market has given very good returns, and that too with very low volatility. Good returns with low volatility are the best combination that any investor wants. Let us look at the returns of the US, India, and other global markets in the last 10 years.

Table: Global markets – Last 10 years’ performance

Table: Global markets – Last 10 years’ performance

Note: The above returns are for the 10 year period between 30 June 2011 and 30 June 2021. The returns for all countries are in US dollar terms. The returns are based on MSCI Indices, except for the US and China. S&P 500 Index represents the US returns, and China returns are represented by CSI 300 Index in US dollar terms.

As seen in the above table, during the 10-year period:

The US has given the best annualised returns of 14.8%, whereas India has given returns of just 5.6%.
The US has been the best performing market in 2 out of the last 10 years, and India has been the best performing market in only 1 out of the last 10 years.
The US has been among the top 3 performing markets in 7 out of the last 10 years, and India has been among the top 3 performing markets in 5 out of the last 10 years.
In terms of volatility, the US market was the second-lowest volatile market (13.6%), whereas India was the second most volatile market (22.4%) in the last 10 years.

So, the US gave the best annualised returns (14.8%) with very low volatility (13.6%). It is an ideal combination that any investor will want.

Related: Top Performing International mutual funds to invest from India, Global funds, US and China Equity Funds

2) Low correlation between US and Indian stock markets

Historically, the US and Indian stock markets have shared a very low correlation, except when big global events are involved. Correlation is the degree to which the US and Indian stock markets move in coordination with each other. A correlation of less than 1 means that the degree of coordinated moves between the two markets is low. The lower the correlation between the two markets, the better for investors.

2) Low correlation between US and Indian stock markets

As seen in the above chart, in the last 30 years, the correlation between India (Nifty 50) and the US (S&P 500) stock market is just 0.07. So, this makes a good case for diversification into US stocks beyond Indian stock markets.

3) Indian rupee depreciation benefit

In the last 15 years or so, the INR has seen a gradual depreciation against the USD. Rupee depreciation enhances the portfolio returns of an Indian investor investing in US equities. 

For example, assume that 5 years back, an Indian investor bought USD 1000 at Rs 70/USD and invested them in US equities. The investment cost will be Rs 70,000 (1000 USD x Rs 70/USD). In 5 years, the investment value doubled to USD 2000. The investor booked profits and converted them to Indian rupees at the current exchange rate of Rs 75/USD. 

The investor will get Rs 1,50,000 (USD 2000 x Rs 75/USD). Had the exchange rate stayed the same at Rs 70/USD, the investor would have got Rs 1,40,000 (USD 2000 x Rs 70/USD). So, the additional return of Rs 10,000 (Rs 1,50,000 – Rs 1,40,000) has come only because of the Indian Rupee depreciating from Rs 70/USD to Rs 75/USD in 5 years. 

The above is a hypothetical example to understand the impact of Indian rupee depreciation against the US dollar. It does not consider the actual USD/INR exchange rates and capital gains tax applicable.

Table: Benefit of Indian rupee depreciation

Table: Benefit of Indian rupee depreciation

Note: The above data is as of December 2020. The blended portfolio (80:20 and 60:40) has a higher allocation to Nifty 50 and remaining to S&P 500.


As we can see from the above table:

 

  • In US dollar terms, S&P 500 gave returns of 10% CAGR during the 14-year period (2007-20).
  • During the same period, Nifty 50 gave returns of 11.7% CAGR in Indian rupee terms. The Nifty 50 returns (11.7% CAGR – INR terms) were better than the S&P 500 returns (10 CAGR – USD terms).
  • However, during the same time, the Indian rupee depreciated by 3.9%, compounded annually.
  • After considering the Indian rupee depreciation, the S&P 500 returns got enhanced to 15.2% CAGR from 10% CAGR. In Indian rupee terms, the S&P 500 enhanced returns of 15.2% CAGR are way better than the Nifty 50 returns of 11.7% CAGR.
  • Having a blended portfolio of Nifty 50 (80% allocation) and S&P 500 (20% allocation) gave blended returns of 13.2% CAGR, which is higher than the Nifty 50 standalone returns of 11.7% CAGR.
  • Having a blended portfolio of Nifty 50 (60% allocation) and S&P 500 (40% allocation) gave blended returns of 14.2% CAGR, which is higher than the Nifty 50 standalone returns of 11.7% CAGR.

4) FAANG companies: Opportunity to become investor along with consumer

Most Indians have been consumers of most FAANG (Facebook, Amazon, Apple, Netflix, and Google [now Alphabet]) companies. As these companies are listed on the US stock exchanges, the only way we Indians can participate in their growth story is by investing in US stocks. US stocks give us an opportunity to be investors in the FAANG companies and many other well-known global companies such as Coca-Cola, Microsoft, McDonald's, Johnson & Johnson, Goldman Sachs, Bank of America, etc.

5) Diversification for country-specific risk

Exposure solely to Indian assets (Indian stocks, bonds, real estate, etc.) exposes us to a country-specific risk. Factors like political uncertainty, terrorist attack, war, RBI monetary policy, government fiscal policy, etc., can sometimes lead to a sell-off in Indian asset classes if markets don’t like the adverse event. 

We can mitigate this risk by diversification at an international level. US stocks present a good opportunity for international diversification. In fact, many US companies are global companies, with roughly 50% of their sales coming from the international markets. So, investing in US stocks give us an opportunity to have global diversification to many other countries beyond the US.

​Related: How to evaluate country-specific risks when investing in international markets?

How to invest in US stocks?

By now, if you are convinced to invest in US stocks, then there are two ways of doing it:

  • Direct US equity: As an investor, you can invest directly in US stocks. You will have to open a trading account with access to US stock markets such as Interactive Brokers, Vested Finance, Stockal, etc. You will have to transfer funds to your trading account, which will involve transfer charges. You can then directly invest in your favourite FAANG stocks or any other US stocks.
  • International mutual funds: Investing in US stocks directly has its own set of challenges. You have to pay various charges such as trading account opening charges, maintenance charges, fund transfer charges, and brokerage charges. Besides, you will have to do your own research on which stocks to buy. All this can be overwhelming, so you can choose to take the mutual fund route. Many Indian mutual fund houses offer international mutual fund schemes that can give you exposure to US stocks. By investing through mutual funds, you can avoid the hassles of direct investing. 

Related: Top Performing International Mutual Funds To Invest From India, Global Funds, US And China Equity Funds

Last words

Exposure to international equity should be a part of your asset allocation, irrespective of whether you choose the direct US equity or international mutual funds investment option. As we saw, US equities can give you multiple benefits – such as the opportunity to earn superior returns, benefit from Indian rupee depreciation, low correlation with Indian stocks, diversification for country-specific risk, etc. Lastly, US stocks give you the opportunity to invest in your favourite FAANG stocks or other global brands.

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