Your Questions Answered: I want to invest in mutual funds tracking NASDAQ 100. Please elaborate its pros and cons

Q. I run a small dental clinic in my hometown: Kanpur. My wife is a teacher in a senior secondary government school. We have been investing in large-cap index mutual funds. We now want to have a more diversified portfolio geographically. Many of our school friends who have settled abroad have suggested investing in mutual funds tracking NASDAQ 100. However, we have a limited understanding of NASDAQ 100. Can you please throw some light on the NASDAQ 100 and the pros and cons of investing in mutual funds tracking the NASDAQ 100?

Rishabh Panth, Kanpur, Uttar Pradesh

India’s mutual fund industry has experienced remarkable growth in product offerings, especially in US equity-focused funds, in recent years. Amongst these, mutual funds tracking NASDAQ 100 have garnered significant interest from investors. These mutual funds aim to replicate the portfolio and performance of the NASDAQ 100 Index.

NASDAQ 100 consists of the 100 largest non-financial companies listed on the NASDAQ stock exchange in the United States of America. The NASDAQ stock exchange is situated in New York and is the second largest stock exchange in the world behind the New York Stock Exchange in terms of total market capitalization.

NASDAQ 100- Explained

Indians can gain exposure to the NASDAQ 100 index through two popular investment options. They can either invest in (a) mutual funds classified as Exchange Traded Funds (ETF) investing in NASDAQ 100 or (b) mutual funds classified as funds of funds (FOFs). In this Q&A we will be covering investing through FOFs.

It is important to understand what FOFs are before considering investing in them. FOFs invest the money they collect from investors into other underlying mutual fund schemes. In the case of FOFs tracking NASDAQ 100, they invest the money they have raised from individuals into NASDAQ 100 ETFs. These ETFs replicate the NASDAQ 100 Index by investing in the companies constituting the NASDAQ 100 and giving them the same weightage as provided by the NASDAQ 100 Index.

The NASDAQ 100 is a barometer of global technological prowess and innovation. For Indian investors who are looking to diversify their portfolio geographically and invest in stocks apart from domestic stocks, NASDAQ 100 FOFs offer a gateway to investing in some of the world’s leading tech giants.

Pros of investing in NASDAQ 100 FOFs

Diversification: One of the primary benefits of investing in NASDAQ 100 FOFs is the diversification it offers. Investors gain exposure to the US stock market, especially in the technology sector, which is under-represented in the case of the Indian stock market.

Growth potential: The NASDAQ 100 FOFs invest in companies that have high growth potential. Investing in these companies through mutual funds can provide investors with the opportunity to participate in the growth of these global giants. In the recent past shares of companies operating in the artificial intelligence space have skyrocketed because of the increasing demand for artificial intelligence. Many of the companies situated in the artificial intelligence space are part of the NASDAQ 100 such as Microsoft, Nvidia, and Google.

Convenience: For Indian individual investors, NASDAQ 100 FOFs offer a convenient way to invest in US stocks. Investing in NASDAQ 100 FOFs does not require a US bank account or US stockbroking account. The investors are also saved from dealing with the complexities of foreign exchange regulations. Investors can invest in NASDAQ 100 FOFs the way they invest in any other domestic mutual funds.

Professional management: NASDAQ 100 FOFs are managed by professional fund managers who have the expertise and resources to manage the investments made by individuals and have the potential to generate good returns.

Cons of investing in NASDAQ 100 FOFs

Currency risk: Investments made in NASDAQ 100 FOFs are made by Indian investors in INR. However, mutual fund houses convert INR to USD to purchase US stocks. Since these investments are ultimately made in US dollars, investors are exposed to currency risk. Fluctuations in the exchange rate between the INR and the USD can significantly affect returns.

Geopolitical risks: Investing in NASDAQ 100 FOFs exposes investors to the US stock market. As a result, investors are exposed to geopolitical risks, which can be unpredictable and may negatively impact investment returns.

Tax considerations: Indian investors investing in NASDAQ 100 FOFs need to be aware of the tax implications of investing in these mutual funds. NASDAQ 100 FOFs are classified as debt mutual funds under the Indian taxation regime and are taxed accordingly.

Market risk: The NASDAQ 100, while known for its high-growth companies, also comes with high volatility. This means that there can be significant fluctuations in the value of investments, especially in the short term.

Performance of NASDAQ 100 FOFs

The NASDAQ 100 has given a ~33% return over the last 1 year. Below we have mentioned the top NASDAQ 100 FOFs (direct schemes) basis their Assets Under Management (AUM):

Source: AMFI website; data as of 16th August 2024

Taxation of investment made in NASDAQ 100 FOFs

The investments made in NASDAQ 100 FOFs have a peculiar taxation. The Indian government has classified domestic mutual funds investing in equities outside of India as debt mutual funds for taxation purposes. It is important to understand that these funds are investing in equities of US companies and are therefore classified as debt mutual funds for taxation purposes.

In conclusion,for investors looking to diversify their portfolio internationally and capitalise on the growth of the US tech sector, Indian mutual funds investing in the NASDAQ 100 present an attractive option. Investors have the opportunity to participate in the potential upside of some of the most influential global tech companies, all while managing their investments from the comfort of their home country.

Before making any investment decisions, it’s crucial for investors to consider their financial goals, risk tolerance, and investment horizon. Investors should take into account all the policy changes and fluctuations in NASDAQ 100 because of geo-political events before they make any investment decision pertaining to NASDAQ 100 FOFs. Consulting with a financial advisor can provide personalised advice tailored to an individual’s unique financial situation.

Disclaimer: Investing in mutual funds involves risks, including potential loss of principal. Please consult with a financial advisor before making any investment decisions.

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