Looking beyond Indian equity mutual funds

13 Sep 2020

I was searching for international mutual funds/ETFs available for Indian investors. What prompted the search was the current socio-economic situation in India. The growth of the Indian economy had slowed down even before Covid19. Our response to Covid19 has made it even worse. That, combined with a divisive and totalitarian government, which seems to be prioritizing staying in power over everything else, may result in faltering the growth story of India.

With this search, I wanted to keep things simple - one US index fund. Which significantly reduced the options (a good thing).

  • US because - well-known indices, many truly global companies.
  • Index fund because - not willing to put effort into selecting an active fund. I would be okay with the returns and drawdowns of it.
  • One because - I wouldn’t be getting rid of my Indian investments completely, and the size of an overseas fund in my portfolio won’t be big enough to warrant more than one fund.

Feeder funds here have atrocious expense ratios, even for direct plans.

A mutual fund like Parag Parikh Long Term Equity Fund would have been a great choice had I been starting my investment journey now. Or if I was willing to exit my current MFs and only use that fund. Adding it on top of other Indian funds makes exposure to foreign equities insignificant.

That left me with two indices - S&P 500 and NASDAQ 100. S&P 500 is broader, well-diversified. NASDAQ 100 is tech-heavy and more volatile. I left out Dow Jones because there aren’t enough options to invest in it. Also, their selection criteria seemed pretty opaque.

Currently, there are four options for investing in NASDAQ 100 or S&P 500:

  1. Motilal Oswal NASDAQ-100 ETF (N100): An Indian ETF that tracks a US index

    While this looks good on paper, liquidity is an issue. Currently, there aren’t enough sellers, so it is trading at a premium. It may happen that it might be trading at a discount when you want to sell.

  2. Motilal Oswal NASDAQ-100 FoF: A mutual fund that invests in such ETF

    Solves the liquidity issue since that becomes the AMCs headache. But since this buys units from the underlying ETF, it is affected by the volatility of the ETF.

  3. Motilal Oswal S&P 500 Index Fund: A mutual fund that tracks S&P 500

    This should be better than the above two options. However, the fund hasn’t been in existence for long enough to have enough data on tracking error.

  4. Invest directly in US ETFs via something that lets you invest in US securities. Like Vested Finance.

    You can invest in the popular US ETFs such as Vanguard S&P 500 and Invesco QQQ via this. Liquidity won’t be much of an issue here since these ETFs are very large (also very inexpensive). The biggest drawback here is high foreign remittance charges. For an investment amount of 1,50,000 for two years, this comes at around 4500Rs (including withdrawals). That’s a 3% additional cost.

    Another big concern is the retrieval of assets/cash in the US brokerage account if you die, or if the brokerage firm goes bust. Dealing with foreign entities won’t be a smooth experience. Plus, there could be some regulations such as this, which you might not even be aware of.

I made a sheet tracking deviation of these three options from their respective indices for a month. Motilal Oswal’s S&P 500 has fared much better than the NASDAQ ones.

I haven’t made my decision yet. I am a bit biased towards NASDAQ. I believe that technology companies would continue to do well in the future, can’t say the same about financial companies. The decision would have been easier had there been an Indian mutual fund that tracked NASDAQ directly (not via an ETF). It would have been a no brainer had the taxation for international equity funds been on par with Indian equities. But that isn’t the case. So I guess I will have to bite the bullet and go with one of the options mentioned earlier.

Note: I have been reading about investments and personal finance during this lockdown. My thought process around it is shaped largely by Capitalmind and Freefincal. I absolutely love the Capitalmind podcast. Freefincal’s A Beginner’s Guide To Investing in Debt Mutual Funds is a comprehensive free ebook on debt mutual funds. CA Rachana Ranade’s YouTube channel is a good resource if you are interested in investing in stocks. And of course, there is Varsity.