Why smart indian investors are adding US stocks for portfolio diversification

The US stock market boasts a massive $50.8 trillion market capitalisation, which offers a great opportunity to diversify portfolios. Companies like Nvidia, now valued at $3.34 trillion, demonstrate why Indian investors are drawn to US markets.

All but one of these affluent investors have equity exposure to the US market, and for good reason. US stock investments give investors access to global giants like Apple, Google, Microsoft, and Tesla. Past data reveals that portfolios with US equities performed better during Indian market downturns, including the 2016 demonetisation and 2020 COVID-19 pandemic.

This piece shows you how to build a resilient international portfolio with US stocks. You'll learn about diversification strategies that work, risk management techniques, and practical investment approaches within the $250,000 annual limit under the Liberalised Remittance Scheme.

Understanding international portfolio diversification

Indian investors now prefer US markets, as trading volumes grew by 45% through 2023. This trend shows how investors want to spread their investments globally. Young investors and NRIs lead this shift toward international markets.

Why US markets attract Indian investors

Because of their size, US markets offer great opportunities. The Dow Jones Industrial Average's market value is $8.33 trillion, almost eight times bigger than India's BSE Sensex, which is $1.16 trillion. US markets also host many innovative companies. Investment in AI and chip companies grew by 45% to reach ₹ $843.80 million.

Benefits beyond geographical diversification

US market investments offer more than simple portfolio diversity:

• Assets in dollars can gain value over time
• Markets are more stable and mature
• Access to the world's leading companies
• Safety when Indian markets decline

Research shows that portfolios with US stocks perform better when India's economy faces challenges.

Risk-return dynamics of US investments

US markets show less ups and downs than Indian markets, which leads to steadier returns. The S&P 500's journey from 2009 to 2019 proves this stability. It grew by 5.7% even after an original 8% drop. This stability makes US markets attractive to Indian investors who want balanced portfolios.

Building a diversified portfolio with US stocks

Building a strong portfolio requires smartly distributing investments in different sectors and market sizes. Smart investors who understand these elements can create a well-diversified investment strategy.

Sector allocation strategies

A smart sector-based approach helps portfolios align with economic trends and business cycles. Smart investors don't pick sectors randomly—they focus on sectors with different economic drivers. Technology, healthcare, and consumer non-durables are vital sectors for US market exposure. Aligned sectors react differently to market conditions and reduce the portfolio's overall volatility.

Market cap considerations

Market capitalization greatly affects portfolio risk and returns. Large-cap compa843.80 billion to INR 16876.09 billion) provide stability through their diverse business structures. Mid-cap firms (INR 168.76 billion to INR 843.80 billion) offer growth opportunities with moderate risk. Small-cap stocks (INR 25314.14 million to INR 168.76 billion) come with higher growth and have brought greater volatility.

Balancing growth and value stocks

Growth and value stocks play different roles in portfolio building. Growth investors look for companies with strong earnings progression, while value investors search for undervalued assets. Here are the key aspects to think over:

• Growth stocks show higher earnings growth, whatever the economic conditions
• Value stocks tend to recover as markets recognise their true worth
• A mix of both styles helps maximise returns while managing risk

Recent data reveals large-cap stocks have performed better than small-caps, though each category has led the market at different times historically. The best approach to spread investments across both growth and value segments to create a balanced portfolio structure historically is to spread.

Smart ways to invest in US markets

Your choice of investment vehicle shapes the success of your international portfolio. Understanding the differences between investment options can help you make better decisions.

Direct stock investments vs ETFs

Stock picking works best when returns vary significantly within a sector. ETFs, on the other hand, perform well if sector returns cluster around the mean and provide broader market exposure. They also reduce investment risk because they spread investments across multiple companies. Here are some key advantages of ETFs:

• Lower volatility through diversified holdings
• Professional portfolio management
• Easy trading experience
• Affordable market exposure

Mutual funds with international exposure

US-focused mutual funds are a great way to diversify your international portfolio. In 2024, these funds delivered an average return of 24%, with top performers achieving 38% gains. The biggest problem is that mutual funds have an investment ceiling of INR 590.66 billion for foreign securities.

Using fractional shares effectively

Fractional investing creates opportunities to own high-value US stocks with minimal capital. You can begin with just INR 0.84 (1 cent). This works well, especially when you have expensive shares like those of Amazon or Google. Your returns stay proportional to investment size with fractional shares - a 5% stock gain gives you 5% returns on your fractional holding.

Your chosen platform affects your investment experience. Leading brokers don't charge commissions for fractional share trading. This makes building a diverse portfolio affordable. New investors find fractional shares as an easy entry point to premium US stocks without needing large capital. commissions, making

Managing risks in international investing

Managing risk effectively leads to successful international investing. Understanding and reducing what it all means protects your portfolio's growth over time.

Currency risk mitigation strategies

Exchange rate fluctuations between INR and USD directly affect investment returns. Hedging strategies play a vital role here. Forward contracts help lock specific exchange rates for future transactions. Currency ETFs provide another way to manage exposure effectively. Multi-currency accounts reduce frequent conversion needs and related fees.

Tax implications and compliance

US investments face both Indian and US tax regulations. The Double Taxation Avoidance Agreement (DTAA) outlines these key points for US stocks:

• India alone taxes capital gains from stock sales
• Dividend withholding tax stands at 25% in the US
• Foreign tax credit applies against Indian tax liability
• Schedule FA of ITR requires mandatory reporting of foreign assets

Monitoring and rebalancing techniques

Regular portfolio rebalancing keeps your desired asset allocation intact. The largest longitudinal study shows that annual rebalancing works best for most investors. Trigger-based rebalancing activates when portfolio weightings move beyond set limits.

These elements need monitoring:

• Review asset allocation quarterly
• Track currency exposure systematically
• Check sector weightings periodically
• Assess tax implications before rebalancing

The Liberalised Remittance Scheme (LRS) allows investments up to INR 21095112.70 per financial year. International portfolio management succeeds through consistent monitoring. Timely adjustments help maintain the right balance between risk and returns.

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Moving forward

The US stock market can significantly strengthen your investment portfolio. Its market size, consistent returns, and access to global industry leaders make it an appealing choice for Indian investors who want to grow their wealth.

Your US investment needs careful planning to succeed. You can manage risks and optimise returns by using a balanced mix of ETFs, mutual funds, or fractional shares. Long-term success in international investing depends on regular portfolio monitoring, rebalancing, and proper tax compliance.

US stocks provide excellent protection for your wealth when local markets decline. The investment process might look complicated initially. However, with proper knowledge and the right strategy, you can build a strong international portfolio. Note that you should stay within the LRS limits and select investment options that align with your financial goals and risk tolerance.

Disclaimer: This guide provides general investment insights. Consult a financial advisor for tailored strategies. We assume no liability for investment outcomes or market changes.

Contributed by Denila Lobo

Denila is a content writer at Winvesta. She crafts clear, concise content on international payments, helping freelancers and businesses easily navigate global financial solutions.