US-focused funds and the US market have performed exceptionally well over the past year. The NASDAQ 100 has gained around 32 percent and the S&P 500 has gained around 31 percent in the past one year. This is almost equal to the returns of Indian market indices like the Nifty 100 and Nifty 500 which have given returns of around 31 percent and around 32 percent respectively.

Increasing productivity with artificial intelligence

There has been a massive revolution in the US based on artificial intelligence (AI). Pratik Oswal, head (passive fund business), of Motilal Oswal Asset Management Company (AMC), said, "This has fueled the growth of many American companies, especially the technology giants."

Last year's gains were concentrated in seven major technology stocks, but non-technology stocks in the S&P 500 have performed better this year. Now that inflation concerns have eased, there is room for the US Federal Reserve to cut rates by 50 basis points.

Vishal Dhawan, chief financial planner at Plan Ahead Wealth Advisors, said, "The expectation of further rate cuts is a positive trend for the market." Now the fear of recession has reduced and unemployment is also showing signs of decline.

Diversify with US funds.

Investors can still invest in US equity funds. "Any time is good to invest in US equity funds for diversification," said Avinash Luthria, a Securities and Exchange Board of India (SEBI) registered investment advisor (RIA) and founder of Fiduciaries.

Oswal says that the US should be the first choice for international diversification as it represents 60 to 70 percent of global market capitalization. The rupee is depreciating by 3 to 4 percent per annum on an average against the dollar. In such a situation, investing in the US is necessary to protect against currency risk. A low correlation between the Indian and US markets provides stability to the portfolio.

Geopolitical and valuation risks

However, geopolitical tensions such as the conflict in West Asia and the Ukraine war have increased the risk of investing in US equities. Current valuations are quite high. "If an investor moves to a more technology-heavy index, he will have to enter at a much higher valuation," Dhawan said.

The Reserve Bank of India (RBI) has imposed several restrictions on foreign investment, which has created a lot of complications. Luthria said, "Every time an investor invests, he has to find out whether the fund he is interested in is accepting money or not. He also has to see whether it would be better to invest through SIP or lump sum."

Who should invest

Financial planners suggest that it is better to build a diversified domestic portfolio before investing in US equity funds. Dhawan said, "Investors with foreign currency-based goals like foreign education or foreign travel should definitely invest in US equity funds." He cautioned that if you want to invest for a short period, then you can ignore it for now due to high valuations.

Invest in installments

New investors should invest through SIPs for a period of 7 to 10 years. They should opt for passive funds as historically these funds have performed better than active funds in the US. Oswal suggests that investors should allocate at least 15 to 20 percent of their equity portfolio to the US market. But one should be cautious about the difference in taxes.

"Investments in foreign equity funds are subject to long-term capital gains tax at the rate of 12.5 percent if held for more than 24 months," Luthria said.

Think seriously before you sell

Despite the recent rally, investors should sell their investments in US equity funds only if their investment objective has been achieved or they are in urgent need of money.

Another reason for redeeming investments could be to rebalance the portfolio. But Luthria cautions against selling US funds just to rebalance the portfolio, given the difficulty of buying them. He suggests that portfolios can also be balanced by investing more in Indian equities.