US ETF vs Indian mutual funds: Which is better for Indian investors?
Indian investors today have more choices than ever before. You can stick with familiar Indian mutual funds or buy U.S. ETFs that track the S&P 500 and Nasdaq. Each option brings unique strengths to your portfolio. The real question is which option better fits your goals, risk appetite, and tax situation.
This guide breaks down the debate between U.S. ETFs and Indian mutual funds across seven key factors.
If you are new to this space, first understand what an ETF is and how it differs from a mutual fund.
By the end, you will know exactly where your money works harder,
How costs stack up: Expense ratios, loads, and hidden fees
The cost comparison of ETF mutual funds shows a strong tilt in favour of U.S. ETFs. Vanguard's VOO and iShares' IVV charge just 0.03% per year. That means you pay ₹30 annually on a ₹1 lakh investment. Compare that to India's best Nifty 50 index funds, which charge 0.14% to 0.20% on direct plans.
Actively managed Indian large-cap funds cost 0.55% to 1.05% on direct plans. Over a 20-year horizon, this fee gap compounds into lakhs of lost returns. Indian fund-of-funds that track the S&P 500 carry expense ratios of 0.50% to 1.70%, making them the most expensive route to U.S. markets.
The expense ratio of the US ETF India gap is clear, but costs don't end at fund fees. Indian investors buying U.S. ETFs face forex conversion spreads of 0.50% to 1.50% on most domestic platforms. Interactive Brokers charges just 0.002% for currency conversion, but it has a steeper learning curve. Indian mutual funds incur no foreign exchange costs but may impose a 1% exit load if you redeem within one year.
There is also the TCS factor. The government collects 20% tax at source on foreign remittances above ₹7 lakh per financial year. You get this back when filing your ITR, but it locks up cash in the meantime. Sending ₹25 lakh abroad triggers roughly ₹3.6 lakh in upfront TCS on the amount above the threshold.
Return comparison: S&P 500 vs Nifty 50
The S&P 500 delivered approximately 25% returns in 2024, while the Nifty 50 managed around 8.8%. When you add rupee depreciation of about 2.8% that year, the S&P 500 returned nearly 28% in INR terms. That gap of almost 20 percentage points made headlines across financial media.
Over the long term, the numbers remain compelling. The S&P 500 has delivered 14%-15% annualised returns over five years in USD terms. Add 3% to 4% annual rupee depreciation, and Indian investors earned 17% to 18% in INR terms. The Nifty 50 returned 14% to 16% over the same period. A decade ago, ₹100 invested in the S&P 500 grew to roughly ₹444, while the same amount in the Sensex reached about ₹236.
However, past performance swings both ways. In 2022, the S&P 500 fell 18.1% in USD terms while the Nifty 50 gained 4.3%. Indian markets have their own bull runs. The correct answer depends on your time horizon and willingness to ride volatility in a foreign currency.
Currency exposure benefits: The rupee depreciation tailwind
The Indian rupee has depreciated from roughly ₹43.60 per dollar two decades ago to around ₹86- ₹87 in early 2025. That works out to about 3.4% annual depreciation over 20 years. This steady decline acts as a built-in return booster for every rupee you invest in dollar assets.
Here is the simple math. If the S&P 500 returns 10% in USD and the rupee falls 3%, your effective INR return reaches approximately 13.3%. This currency tailwind added 3-4 percentage points annually to U.S. investment returns for Indian investors over the past decade.
Even during U.S. market downturns, rupee depreciation softens the blow. In 2022, the rupee fell 11.3% against the dollar. That cushioned the S&P 500's 18.1% USD loss to roughly 9% in INR terms. Domestic Indian mutual funds offer no such currency hedge against India-specific economic risks.
Diversification U.S. vs India: Why both markets complement each other
The S&P 500 and Nifty 50 are structurally very different. Technology dominates the U.S. index at 31%-32%, while financials account for 33%-36% of the Nifty 50. Healthcare makes up 12% to 13% of the S&P 500 but barely 3% to 4% of India's benchmark. These differences create genuine diversification when you hold both.
The historical correlation between the two indices is approximately 0.40-0.55. That means they move together only about half the time. Research shows that adding 20%-30% of the U.S. allocation to an all-India portfolio reduces volatility by 2-4 percentage points without sacrificing returns.
U.S. ETFs also give you access to global technology giants like Apple, Microsoft, NVIDIA, and Amazon. These companies generate around 40% of their revenue from outside the U.S., providing indirect global exposure. Nifty 50 top holdings such as HDFC Bank and Reliance Industries generate most of their revenue domestically. That creates concentrated country risk, which diversification of U.S. vs. India exposure directly addresses.
Concentration risk also differs sharply. The S&P 500's top 10 stocks represent 36% to 38% of the index across 500-plus companies. The Nifty 50's top 10 stocks hold 57% to 60% of weight across just 50 companies.
Tax difference US ETF Indian MF: What you actually pay
The difference between the UETFs and the MFs is one of the most important factors in this decision. Indian equity mutual funds enjoy favourable treatment. Long-term capital gains apply after just 12 months at 12.5%, with an annual exemption of ₹1.25 lakh. Short-term gains attract a flat 20% tax rate.
U.S. ETFs held directly face a different structure. You need to hold for 24 months to qualify for long-term treatment. The LTCG rate is 12.5%, with no exemption threshold. Short-term gains get taxed at your income tax slab rate, which can reach 30% plus surcharge for higher earners.
Dividends add another layer of complexity. The U.S. government withholds 25% tax on dividends paid to Indian residents under the India-US tax treaty. You must then report the gross dividend as income in India and claim a Foreign Tax Credit through Form 67.
Learn more about tax implications for Indian residents investing in U.S. stocks.
This partial double taxation makes U.S. dividend ETFs less efficient than Indian equity funds, which tax dividends at a single rate.
Budget 2024 removed indexation benefits across all asset classes. This actually narrowed the tax gap slightly for long-term holders of U.S. ETFs. However, the 12-month versus 24-month holding period and the ₹1.25 lakh LTCG exemption still give Indian equity funds a clear tax edge.
Liquidity considerations: Trading hours, settlement, and access
U.S. ETFs trade from 8:00 PM to 1:30 AM IST during standard time. That means late-night trading sessions for Indian investors. The upside is real-time price execution and access to the world's most liquid market. SPY alone trades $30 to $40 billion daily, ensuring tight bid-ask spreads.
Indian mutual funds operate during regular business hours with orders executed at end-of-day NAV. You cannot trade intraday or set limit orders. Settlement for U.S. ETFs has been T+3 since May 202, compared to T+14. However, the simplicity of placing an order through a mutual fund app during daytime hours suits most retail investors.
A critical regulatory risk exists for Indian fund-of-funds investing abroad. SEBI has periodically halted fresh investments when the industry's $7 billion overseas investment cap approaches its limit. This can freeze your SIP without warning. Direct US ETF investments through the LRS route face no such cap, though the $250,000 per person annual limit under the Liberalised Remittance Scheme applies.
Which suits different investor profiles
Your ideal choice depends on your specific situation. New investors with smaller portfolios benefit from starting with Indian index funds. The lower tax burden, zero forex costs, and daytime accessibility make them a simpler entry point. A Nifty 50 or Sensex index fund with a 0.15% expense ratio delivers solid domestic market exposure.
Experienced investors with portfolios above ₹10 lakh should consider allocating 15%-25% to U.S. ETFs. The diversification benefits become statistically meaningful at this allocation level. Use a platform with competitive forex rates to keep costs low. VOO or VTI through Interactive Brokers offers the cheapest all-in cost at roughly 0.06% to 0.25% annually.
High-income earners in the 30% tax bracket should carefully weigh the tax difference. The slab-rate short-term capital gains tax on U.S. ETFs can significantly erode returns. If you plan to hold for more than two years, the tax gap narrows. For shorter holding periods, Indian equity funds win on after-tax returns.
The most innovative approach for most Indian investors is a blended portfolio. Keep 70%-85% in Indian equity funds for tax efficiency and simplicity. Allocate 15%-30% to U.S. ETFs for diversification, currency exposure, and access to global technology leaders. This split captures the strengths of both markets while managing the weaknesses of each.
The US ETF vs. Indian MF debate has no single winner. Both instruments serve different purposes in a well-constructed portfolio. Indian funds offer tax advantages and ease of access. U.S. ETFs deliver lower costs, stronger recent performance, and genuine diversification. The real advantage goes to investors who use both strategically.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage companies, and not of Winvesta. We advise investors to check with certified experts before making any investment decisions.
Ready to earn on every trade?
Invest in 11,000+ US stocks & ETFs
Table of Contents
Indian investors today have more choices than ever before. You can stick with familiar Indian mutual funds or buy U.S. ETFs that track the S&P 500 and Nasdaq. Each option brings unique strengths to your portfolio. The real question is which option better fits your goals, risk appetite, and tax situation.
This guide breaks down the debate between U.S. ETFs and Indian mutual funds across seven key factors.
If you are new to this space, first understand what an ETF is and how it differs from a mutual fund.
By the end, you will know exactly where your money works harder,
How costs stack up: Expense ratios, loads, and hidden fees
The cost comparison of ETF mutual funds shows a strong tilt in favour of U.S. ETFs. Vanguard's VOO and iShares' IVV charge just 0.03% per year. That means you pay ₹30 annually on a ₹1 lakh investment. Compare that to India's best Nifty 50 index funds, which charge 0.14% to 0.20% on direct plans.
Actively managed Indian large-cap funds cost 0.55% to 1.05% on direct plans. Over a 20-year horizon, this fee gap compounds into lakhs of lost returns. Indian fund-of-funds that track the S&P 500 carry expense ratios of 0.50% to 1.70%, making them the most expensive route to U.S. markets.
The expense ratio of the US ETF India gap is clear, but costs don't end at fund fees. Indian investors buying U.S. ETFs face forex conversion spreads of 0.50% to 1.50% on most domestic platforms. Interactive Brokers charges just 0.002% for currency conversion, but it has a steeper learning curve. Indian mutual funds incur no foreign exchange costs but may impose a 1% exit load if you redeem within one year.
There is also the TCS factor. The government collects 20% tax at source on foreign remittances above ₹7 lakh per financial year. You get this back when filing your ITR, but it locks up cash in the meantime. Sending ₹25 lakh abroad triggers roughly ₹3.6 lakh in upfront TCS on the amount above the threshold.
Return comparison: S&P 500 vs Nifty 50
The S&P 500 delivered approximately 25% returns in 2024, while the Nifty 50 managed around 8.8%. When you add rupee depreciation of about 2.8% that year, the S&P 500 returned nearly 28% in INR terms. That gap of almost 20 percentage points made headlines across financial media.
Over the long term, the numbers remain compelling. The S&P 500 has delivered 14%-15% annualised returns over five years in USD terms. Add 3% to 4% annual rupee depreciation, and Indian investors earned 17% to 18% in INR terms. The Nifty 50 returned 14% to 16% over the same period. A decade ago, ₹100 invested in the S&P 500 grew to roughly ₹444, while the same amount in the Sensex reached about ₹236.
However, past performance swings both ways. In 2022, the S&P 500 fell 18.1% in USD terms while the Nifty 50 gained 4.3%. Indian markets have their own bull runs. The correct answer depends on your time horizon and willingness to ride volatility in a foreign currency.
Currency exposure benefits: The rupee depreciation tailwind
The Indian rupee has depreciated from roughly ₹43.60 per dollar two decades ago to around ₹86- ₹87 in early 2025. That works out to about 3.4% annual depreciation over 20 years. This steady decline acts as a built-in return booster for every rupee you invest in dollar assets.
Here is the simple math. If the S&P 500 returns 10% in USD and the rupee falls 3%, your effective INR return reaches approximately 13.3%. This currency tailwind added 3-4 percentage points annually to U.S. investment returns for Indian investors over the past decade.
Even during U.S. market downturns, rupee depreciation softens the blow. In 2022, the rupee fell 11.3% against the dollar. That cushioned the S&P 500's 18.1% USD loss to roughly 9% in INR terms. Domestic Indian mutual funds offer no such currency hedge against India-specific economic risks.
Diversification U.S. vs India: Why both markets complement each other
The S&P 500 and Nifty 50 are structurally very different. Technology dominates the U.S. index at 31%-32%, while financials account for 33%-36% of the Nifty 50. Healthcare makes up 12% to 13% of the S&P 500 but barely 3% to 4% of India's benchmark. These differences create genuine diversification when you hold both.
The historical correlation between the two indices is approximately 0.40-0.55. That means they move together only about half the time. Research shows that adding 20%-30% of the U.S. allocation to an all-India portfolio reduces volatility by 2-4 percentage points without sacrificing returns.
U.S. ETFs also give you access to global technology giants like Apple, Microsoft, NVIDIA, and Amazon. These companies generate around 40% of their revenue from outside the U.S., providing indirect global exposure. Nifty 50 top holdings such as HDFC Bank and Reliance Industries generate most of their revenue domestically. That creates concentrated country risk, which diversification of U.S. vs. India exposure directly addresses.
Concentration risk also differs sharply. The S&P 500's top 10 stocks represent 36% to 38% of the index across 500-plus companies. The Nifty 50's top 10 stocks hold 57% to 60% of weight across just 50 companies.
Tax difference US ETF Indian MF: What you actually pay
The difference between the UETFs and the MFs is one of the most important factors in this decision. Indian equity mutual funds enjoy favourable treatment. Long-term capital gains apply after just 12 months at 12.5%, with an annual exemption of ₹1.25 lakh. Short-term gains attract a flat 20% tax rate.
U.S. ETFs held directly face a different structure. You need to hold for 24 months to qualify for long-term treatment. The LTCG rate is 12.5%, with no exemption threshold. Short-term gains get taxed at your income tax slab rate, which can reach 30% plus surcharge for higher earners.
Dividends add another layer of complexity. The U.S. government withholds 25% tax on dividends paid to Indian residents under the India-US tax treaty. You must then report the gross dividend as income in India and claim a Foreign Tax Credit through Form 67.
Learn more about tax implications for Indian residents investing in U.S. stocks.
This partial double taxation makes U.S. dividend ETFs less efficient than Indian equity funds, which tax dividends at a single rate.
Budget 2024 removed indexation benefits across all asset classes. This actually narrowed the tax gap slightly for long-term holders of U.S. ETFs. However, the 12-month versus 24-month holding period and the ₹1.25 lakh LTCG exemption still give Indian equity funds a clear tax edge.
Liquidity considerations: Trading hours, settlement, and access
U.S. ETFs trade from 8:00 PM to 1:30 AM IST during standard time. That means late-night trading sessions for Indian investors. The upside is real-time price execution and access to the world's most liquid market. SPY alone trades $30 to $40 billion daily, ensuring tight bid-ask spreads.
Indian mutual funds operate during regular business hours with orders executed at end-of-day NAV. You cannot trade intraday or set limit orders. Settlement for U.S. ETFs has been T+3 since May 202, compared to T+14. However, the simplicity of placing an order through a mutual fund app during daytime hours suits most retail investors.
A critical regulatory risk exists for Indian fund-of-funds investing abroad. SEBI has periodically halted fresh investments when the industry's $7 billion overseas investment cap approaches its limit. This can freeze your SIP without warning. Direct US ETF investments through the LRS route face no such cap, though the $250,000 per person annual limit under the Liberalised Remittance Scheme applies.
Which suits different investor profiles
Your ideal choice depends on your specific situation. New investors with smaller portfolios benefit from starting with Indian index funds. The lower tax burden, zero forex costs, and daytime accessibility make them a simpler entry point. A Nifty 50 or Sensex index fund with a 0.15% expense ratio delivers solid domestic market exposure.
Experienced investors with portfolios above ₹10 lakh should consider allocating 15%-25% to U.S. ETFs. The diversification benefits become statistically meaningful at this allocation level. Use a platform with competitive forex rates to keep costs low. VOO or VTI through Interactive Brokers offers the cheapest all-in cost at roughly 0.06% to 0.25% annually.
High-income earners in the 30% tax bracket should carefully weigh the tax difference. The slab-rate short-term capital gains tax on U.S. ETFs can significantly erode returns. If you plan to hold for more than two years, the tax gap narrows. For shorter holding periods, Indian equity funds win on after-tax returns.
The most innovative approach for most Indian investors is a blended portfolio. Keep 70%-85% in Indian equity funds for tax efficiency and simplicity. Allocate 15%-30% to U.S. ETFs for diversification, currency exposure, and access to global technology leaders. This split captures the strengths of both markets while managing the weaknesses of each.
The US ETF vs. Indian MF debate has no single winner. Both instruments serve different purposes in a well-constructed portfolio. Indian funds offer tax advantages and ease of access. U.S. ETFs deliver lower costs, stronger recent performance, and genuine diversification. The real advantage goes to investors who use both strategically.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage companies, and not of Winvesta. We advise investors to check with certified experts before making any investment decisions.
Ready to earn on every trade?
Invest in 11,000+ US stocks & ETFs
