Investing in International Mutual Funds: A US themed Mutual Fund Study

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Many if not all often indulge in Hollywood movies, their fast food, Iphones, Facebook,Twitter and lest we forget, their television shows. 

But we seem to have grossly undervalued their equity contribution, the foremost reasoning was the tax implication on international funds but with LTCG now applicable on Indian Equities, the defense does not sound all that reasonable now does it?

Also keep in mind that with international funds you avail the benefit of indexation with your tax calculations, the same is not available when calculating your taxes for Indian equities.

The following write up will explain why you could be missing out big time by not giving US themed Mutual Funds a serious consideration.

Possible Reasons for US Economic Growth


  1. The US Energy Information Administration expects crude oil prices to average $61/barrel in 2019 for brent global.
  2. A major point to consider here is the standing of Mohammad Bin Salman, the Crown Prince of Saudi Arabia who is expected to reduce Saudi Arabia’s dependence on Oil and look for diversification in the economy. 
  3. Dependence on one non- renewable resource is extremely fragile for an economy as witnessed in the case of Venezuela.
  4. Except for any major outbreak of tensions in the region along with the US becoming the largest producer of crude oil in the world in 2018, the effect of crude oil prices on the US economy is expected to diminish with time.

Consumer driven economy

  1. The US is a consumer driven economy, in the fourth quarter of 2018 the consumer spending was $14.2 trillion according to the Bureau of Economic Analysis. Consumer spending was 68% of the overall economy.
  2. Sectors that play a major role in it are Education services, E- Commerce, Hotels, Resorts and Travel Services, Airlines, Retail, Media & Entertainment among others.
  3. The last US census of 2010 has 36.5% of its population in the 18-44 years age group, more than any other age group. This means the working population is part of that group along with unemployment at 4% in June 2018. A higher working population means higher spending prowess which is very beneficial for a consumer driven economy.
  4. Personal consumption in the US drives almost 70% of the economy and in 2018 American households spent $12.9 trillion.
  5. The Consumer Confidence Index was 131.4 in February 2019, this is an indicator of the Americans outlook towards current and future prospects. When future prospects look bleak, people tend to buy less and when the future looks bright, people buy more. This affects the economy positively and adversely accordingly.

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Fortune 500

  1. Fortune 500 companies represented two-thirds of the US GDP with $12.8 trillion in revenues, $1 trillion in profits, $21.6 trillion in market value and employ 28.6 million people worldwide.Source: Fortune
  2. The 2018 Fortune 500 list had 126 US companies, the most for any country with 3 of them in Berkshire Hathaway, Walmart and Exxon Mobil making the top ten.
  3. Research Development is a big part of the US business set up. There is also a close battle between the US and China for the same, some believe it to be another medium via which China tries to influence global matters along with trade, sports and its military and business interests slowly and gradually spreading around.
  4. The 2018 Fortune 500 list had China in the second position with 120 companies with the US occupying the first position with 126 countries.

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All marked in red are tech companies

Tech companies occupy the top 5 positions with Facebook coming in at ninth.

Research and Development is an integral part of any tech driven company. The world has witnessed the repercussions of treating it nonchalantly in the examples of Nokia and General Motors.

Amazon has pumped in serious cash into technologies like Alexa and the Amazon Go cashierless store. With the Walmart-Flipkart deal in India, it needs to upgrade further to stay competitive.

Alphabet is the parent company for Google, Youtube and the mobile operating system, Android. 86% of Alphabet’s revenues were generated through user clicks using Adsense and Google Ads. 

  1. With more businesses going online, pitching to prospective customers online is no more a strategy one can ignore.
  2. Alphabet and Facebook are both heavily data driven so most of their spending is around figuring out the tastes of online consumers and then making sure the same is also guarded heavily.
  3. Apple as a brand is facing stiff competition from the South Korean giant Samsung. Apple relies heavily on Asia for production as well as for its consumer base. 
  4. Make in America is very heavy on its pocket since the American labour laws are far stricter as compared to some South Asian laws along with minimum wages. It therefore depends on these regions for assembling along with India being a major consumer base.

Possible reasons for US Economic Slowdown

Natural Disasters

  1. According to the US Government Accountability Office, Global Warming will cost $112 Billion per year in the future. As temperatures rise so do the likelihood and frequency of natural disasters like Hurricanes.
  2. In the last 16 years preceding 2019, hurricanes have cost the US economy $700 billion. Droughts, heat waves and wildfires destroy crops and affect the natural cycle.
  3. These events thereby affect food prices which are further worsened off by job losses after such an event. Global warming therefore is a reality, here to stay irrespective of whether we choose to believe it or not.
  4. Natural Disasters kill more people than Terrorism but the budget for fighting the latter is far more than the former. This is not to undermine the fight on terror nor to say nothing has been done with regards to diminishing the effects of global warming but unfortunately, there is still a large gap to bridge between what is being done and what needs to be done.
  5. Global warming has also leads to an increase in health related issues like ashtma for example which adds to the already overburdened expenses with ObamaCare now repealed.

China-US standoff

  1. China along with other emerging markets depends on the US to drive up their exports. In the process they buy US treasuries, this keeps interest rates low which is beneficial for the average American since it denies overburdening of debt. This system is under threat with the China-US standoff though.
  2. China became the largest economy in 2014 but its growth rate had gradually decreased from double digits to single digit. As previously mentioned, China buys US treasuries when it exports to the US thereby buying off US debt but with the trade war between the two countries, the continuity of the same will be severely under threat.
  3. China is a global power to be reckoned with and is always finding new ways to diversify its hegemony. Any attempt to downplay its role would be a serious mistake since other economies are also linked to it. For example, India another major emerging market depends on Chinese imports heavily.  


  1. The US Senate has passed a proposal for an increase in $82 billion for military budget. Wars in Afghanistan and Iraq have already left a heavy debt,critics argue that with the withdrawal of troops from these regions the budget should have come down rather than going up a notch.
  2. What critics miss out though is that despite US reducing global military exposure when it comes to war, it would still need to increase its global exposure to counter the ever growing Chinese influence. China has been a major player when it comes to expanding its influence in Africa along with Pakistan. 
  3. The China-Pakistan Economic Corridor is often seen as a Chinese ploy to check India’s influence in South Asia rather than a bet on Pakistan’s economic prospects.
  4. India remains a key ally of the US in the said region along with the Pacific. France remains a major partner in Africa due to its colonial past whereas Australia is another in the Southern Hemisphere. EU has historically been a stable partner but with recent court cases against US based companies like Facebook, Google and Amazon, it has emerged as a tricky path to walk on.
  5. With the US needing to up the ante to expand its global exposure, the budget for the same is expected to swell further. 

Advantages of US themed International Mutual Fund 

  1. Earlier Large Cap mutual funds were often the go to Mutual Fund for it was consistently generating decent alpha along with providing stability during a market slump. It therefore served dual purposes.
  2. What you must have missed out though is in figuring out why these funds generated decent alphas even when other category funds were struggling.
  3. The reason for this was there was never any clear demarcation between the various categories.
  4. So for example the Invesco Growth Opportunities Fund (Large & Mid Cap) at times had up to 50% of its portfolio allocation in mid & small caps to generate alpha. As soon as these categories seemed overvalued, the fund manager would go back to higher allocation to large caps.
  5. This swinging back and forth resulted in both, a decent growth rate along with providing decent cover during a market slump but that is not the case anymore with SEBI’s re-categorization of Schemes in 2018. A large cap mutual fund now has to allocate 80% of its portfolio into large cap stocks of which there are only around 100, so there’s not much to choose from.
  6. 2018 also proved that Large Caps no more provide stability they once did so sticking to it has to be backed by solid reasoning.

The Difference between a Developed market and a Developing market
The US is a highly developed market so therefore far more stable than emerging markets. Often investors argue that the kind of returns that an emerging market can provide is not something a developed market can and when you look at markets like India and Brazil, that argument has a solid backing. 

What investors forget though is that an emerging market is also more volatile than a developed market, its ability to sustain growth during a downturn is far more less than a developed market, so an ideal scenario would be a mix of both.

             We have covered above how Large cap mutual funds no more provide the stability they once used to. Often in the past investors had looked towards it as a comforting portion in their portfolio, replacing it would be a good call considering the US is a highly developed market and less prone to volatility. Of course this is a very personal allocation and not a general one but it does make for a strong case when it comes to allocation.

Correlation between Indian and US market
The correlation between the US and Indian market is also on the low side so this ensures the over lapping factor is almost negligible. If you hold a Multi cap and a Hybrid Aggressive Fund that too of the same Fund House there are high chances of overlapping of stocks, diversification needs to serve a purpose rather than being a namesake.

Top 5 Holdings of the Reliance US Opportunities Fund in the first week of March 2019
  1) Mastercard Inc A
  2) IQVIA Holdings A
  3) Enbridge Inc
  4) Booking Holdings Inc
  5) O’Reilly Automative Inc  

Axis Opportunities Fund and Parag Parikh Long Term Equity Fund also take international exposure but they are not region specific and they certainly cannot be compared with a US themed Fund.

Investing in Parag Parikh Long Term Equity Fund and Axis Opportunities to gain international exposure would be an extremely poor call since it serves no purpose when studied keenly. It’s neither here nor there; an indecisive investor is a sitting duck for losses.

Click Here to read complete review of Parag Parikh Long Term Equity Fund

Now imagine the same indecisive investor venturing into an indecisive fund. It’s indeed a scary thought to say the least.

Comparing a Large Cap vs a US themed Mutual Fund

Scheme 2016 2017 2018 Average
Reliance Large Cap 2.23 38.42 -0.21 13.48
Reliance US Fund 8.2 16.91 7.64 10.91

Ok first the usual caveat of never investing purely on the basis of past returns.

  1. Now coming to the main point, in the past 3 years the US themed Mutual Fund is far more stable than the large cap fund which has deviated extremely. It goes from 2.23 % in 2016 to 38.42 % the next year to slumping down to negative returns in 2018.
  2. This was the point we were trying to make earlier about stable returns with a low standard deviation, of course you cannot expect the same returns from it as other Indian based equity schemes in a bull run.
  3. That is exactly why you need to understand the reason you have a particular scheme in your portfolio; the reasoning behind your scheme selection is far more valuable than the schemes themselves. Stop expecting FD like safety with equity like returns from any product since no such product exists.
  4. Also do keep in mind that before the SEBI re-categorization of 2018, Large cap mutual funds would take heavy bets in mid and small cap space too in order to generate alpha which involved a huge turnover ratio. This cannot be the case anymore since they need to invest a minimum of 80% of their portfolio into large cap stocks.

What should be your expectations from a US themed Mutual Fund?
With a US themed Mutual Fund scheme though, make sure your returns expectations are moderate and not the same as say an Indian Mid, Small or even a Large and Mid cap scheme.

The reason for this is that the US is a far more stable economy than emerging economies. In fact a higher return than usual should be a cause of concern since it could be a sign of a boom and bust economy as was the case during the 2008 recession.

          International Mutual Funds taxation
For a holding period of less than 3 years, the investor is required to pay short-term capital gains tax on the profits at his/her tax slab.

When the fund is held for more than 3 years, the investor will get the indexation benefit as the profit is treated as long-term capital gain. Post indexation, the gain is taxed at 20%. 

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Disclaimer :While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  
Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing

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