Q. I am a software engineer working at the second headquarters of a global MNC in Hyderabad, my wife is also a software engineer running a small app development start-up. We have been investing in the Indian stock market for the past 7 years. However, the market has been erratic for the past 1-2 years. We are now planning to diversify our mutual fund investment into foreign funds too. We are planning to invest in international index mutual funds tracking US indices launched by several Indian mutual fund houses. At present, we are confused between the S&P 500 and the Nasdaq 100. Can you please throw some light on the differences between the two indices and the pros and cons of investing in international mutual funds?
Mohit Deshpande, Panjagutta, Hyderabad, Telangana.
S&P 500
The S&P 500 is a US stock market index that tracks the 500 largest companies listed on stock exchanges in the United States. It is one of the most popular and widely followed stock market indices in the world and is considered to be a good barometer of the overall U.S. stock market.
The S&P 500 is a market-capitalization-weighted index, which means that the largest companies in the index have the biggest impact on its performance. The index is rebalanced quarterly to ensure that the largest companies remain in the index and that the index accurately reflects the U.S. stock market.
Nasdaq 100
The Nasdaq 100 on the other hand is a stock market index that tracks the 100 largest non-financial companies listed on the Nasdaq stock exchange. It is a technology-heavy index, with companies from the technology, healthcare, and consumer discretionary sectors accounting for a large portion of its weight.
The Nasdaq 100 is also a market-capitalization-weighted index, but it does not include financial companies such as banks and insurance companies. The index is rebalanced quarterly to ensure that the largest non-financial companies remain in the index and that the index accurately reflects the Nasdaq stock exchange.
Differences between index mutual funds tracking S&P 500 and Nasdaq 100
The main difference between the S&P 500 and the Nasdaq 100 index mutual funds is the composition and diversification of their portfolios. The S&P 500 index mutual funds offer exposure to a broader range of sectors and companies, while the Nasdaq 100 index mutual funds offer exposure to a more focused and dynamic set of sectors and companies. The S&P 500 index mutual funds may be more suitable for investors who want to capture the overall performance of the US market and benefit from its long-term growth potential. The Nasdaq 100 index mutual funds may be more suitable for investors who want to invest in the leading companies in the technology and innovation space and benefit from their higher growth potential.
International index mutual funds launched by Indian mutual fund houses
Index mutual funds are mutual funds that track a specific stock market index. They invest in the same stocks as the index and in the same proportions. This means that investors in index mutual funds can expect to earn returns that are similar to the returns of the index they are tracking.
Indian mutual fund houses offer a variety of index mutual funds that track both the S&P 500 and Nasdaq 100 indices. These funds offer investors a convenient way to invest in the US stock market without having to open a brokerage account or trade individual stocks.
Pros of investing in international mutual funds launched by Indian mutual fund houses
Convenience: Investors can invest in international mutual funds through their existing mutual fund accounts in India. This makes it a convenient way to invest in international markets.
Diversification: International mutual funds offer investors a way to diversify their portfolios across different countries and currencies. This can help to reduce risk and improve returns over the long term.
Professional management: International mutual funds are managed by experienced fund managers who have expertise in investing in international markets. This can give investors peace of mind knowing that their money is in good hands.
Cons of investing in international mutual funds launched by Indian mutual fund houses
Expenses: International mutual funds typically have higher expense ratios than domestic mutual funds. This is because they have to incur additional costs such as foreign exchange fees and custodian fees.
Taxation: The gains from international equity mutual funds are taxed at a higher rate than the gains from domestic mutual funds since they are classified as debt mutual funds and taxed accordingly.
Currency risk: International mutual funds are exposed to currency risk. This means that the value of the investment can fluctuate depending on the movement of the Indian rupee against the foreign currency in which the fund is invested.
In conclusion, index mutual funds tracking the S&P 500 and Nasdaq 100 indices offer Indian investors a convenient way to invest in the US stock market. However, investors should carefully consider their investment objectives and risk tolerance before investing in international mutual funds. Overall, international mutual funds can be a good way for Indian investors to diversify their portfolios and gain exposure to international markets. However, investors should be aware of the higher expenses and taxation associated with international investments.
Kuvera is a free direct mutual fund investing platform.
Note: This is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.
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Updated: 02 Nov 2023, 05:01 PM IST
