Comparing different methods of investing in US Index Funds

[hamer]

This sub has been a wealth of information for me. Thought I would contribute some of my research.

There have been many discussions on investing in US S&P 500 via Indian MFs and via brokers (vested.in, TD Ameritrade, HDFC, ICICI etc.). But I couldn't find any info on which option offers better returns (after different costs were accounted). So I made this calculation sheet to figure it out.

Options evaluated:​

• Indian index fund with (e.g. Motilal S&P 500 Index Fund)
• US index fund (e.g. Charles Schwab S&P 500 Index Fund), via international/Indian brokerages (TD Ameritrade, vested.in, Charles Schwab, HDFC, ICICI etc.)

Take a moment to consider the opposing choices: option 1 is easy and doesn't involve any currency conversion loss. On the other hand, option 2 comes with one tenth the Expense ratio and the somewhat amplifying effect of USD also going up over the years.

See Google sheet here for details.

Result:​

investing via international brokerage (option 2) is the winner (assuming 1+ Lac invested for 4+ years). However, given the number of variables and assumptions that have to be made, there is never a single answer. Meaning - in a minority of scenarios, investing via Indian international funds (option 1) is the winner.

For those of you who will be reading the spreadsheet - Feel free to share suggestions for improvement. Let's make this a reusable resource for the group.

Key Assumptions:​

• Motilal S&P 500 ER: 0.5%
• TER (Tracking Error): 0.85%
• US Index fund chosen for option 2: Charles Schwab S&P 500 Index Fund
• ER: 0.02%
• TER: 0.72%
• INR - USD conversion fees and commissions: 1.95%
• Annual rate of growth of USD over INR (To calculate final value in x years): 1.5%Here's why I chose 1.5% - most international forecasts assume 2.5% annual appreciation of USD. Historical data over past 6 years has also shown similar growth. I have rounded it down to 1.5% as a way of balancing optimistic and conservative estimates. Even if you assume a smaller growth like 1%, option 2 still comes ahead. If this rate comes down to 0% option 1 becomes the winner. But think about what that means- will USD really stay the same in 5 years? possible. But definitely not a high probability outcome.

Methodology:​

Future value for Indian fund (option #1 above) = Principle x (1 + 10% - ER - TER ) ^ nof yrs

FV of US index fund scenario = (Principle - currency conversion costs) x ( 1 + 10% - ER - TER) ^ nof yrs

 

[mareag]

@hamer There is one glaring problem - USD appreciation will benefit MO S&P500 as well. And as soon as that advantage for Charles Schwab is removed from your calculations, it becomes obvious the winner is MO S&P500.

Moreover, I do not see where you've accounted for bringing the money back into INR.

 

[hamer]

@mareag

Moreover, I do not see where you've accounted for bringing the money back into INR.

It is factored into the calculation in cell c17 of Sheet1.

There is one glaring problem - USD appreciation will benefit MO S&P500 as well.

Let's talk about this. I thought about this possibility but chose not to factor it into my analysis thinking any such appreciation may be eaten up by the fund house and not passed on to investors. But on second thought now, may that's difficult or low possibility. I want to understand what kind of potential manipulation the fund house can do here. How can we be sure the AMC won't pocket a huge part of this appreciation as some kind of fees/charges/expenses? Is it because if they did, it would show up in the ER or TER? hypothetically, can a fund house become "inefficient" with time and reach TER levels like 1.5%+?

 

[mareag]

@hamer

I want to understand what kind of potential manipulation the fund house can do here. How can we be sure the AMC won't pocket a huge part of this appreciation as some kind of fees/charges/expenses?

If you have faith in NAV calculations of any AMC, you have to have faith here as well.

I surely hope there are mechanisms in place which ensure NAVs are accurate and no appreciation is stolen away from the investors.

MO also uses it INR Depreciation as a selling point - https://www.motilaloswalmf.com/Pdf/...wal-S_P-500-Index-Fund-Direct-and-Regular.pdf

I think it is unfair that you did not even point out in your assumptions that the INR depreciation advantage has only been given to US index fund.

 

[doema]

@mareag It would be great to see the result with INR depreciation. Maybe at 1% to make a comparison?

 

[hamer]

@doema Please elaborate - how/where can I add this in the sheet?

 

[doema]

@hamer

Appreciate the pointer. I had overlooked this. Could you elaborate on how I can factor this in the calculation?

=(B2)*((1+B3+INR dep %-B9-B10)^B4)

at zero INR dep, diff - 9.6%

at 1% INR dep, diff - 3.6%

at 1.5% dep, diff - 0.5%

Possible to backtrack the data and check if this is true for last fifteen years or not?

 

[hamer]

@mareag Appreciate the pointer. I had overlooked this. Could you elaborate on how I can factor this in the calculation?

 

[mareag]

@hamer

Appreciate the pointer. I had overlooked this. Could you elaborate on how I can factor this in the calculation?

You can just do 1.5% appreciation in future value. Or just make it 0% in your sheet so it's constant for both funds.

 

[izzy1728]

@hamer Given the headaches involved in direct investment to us markets its worth the price to go via mutual fund.

 

[hamer]

@izzy1728 The second option involves more effort. But this analysis shows the monetary benefit one would gain from that extra effort. For investing 4 lacs for 5 years, you get an extra Rs. 40,000. Make that 7 years and your additional gains are ~80,000

 

[zashmaster]

@hamer There is a major point that has been overlooked.

US has a pretty bad system of estate taxes for non-residents. The floor is quite low. The way to work around this would be to use Ireland domiciled funds. However having a CSI account would not help as the account may be in India.

 

[hamer]

@zashmaster I haven't overlooked that point. My objective of this post was to focus the spotlight on the financial aspect of the options - how the growth and costs interact with each other and what final future value that results in.
To be clear about your point -It would apply only in case of death of investor, correct?

There are many pros and cons of each option. My post was to purely focus on the financial/cost analysis. That said, this definitely is an important consideration. If the discussion grows further on this thread, I will consider adding this point to the main post, for the benefit of future readers.

 

[mariah36]

@hamer Useful analysis.

You should also add the remittance costs from the international brokerage back to India.

Furthermore, beyond the math, it is also a bit more paperwork to file taxes for directly holding foreign stocks/ETFs, especially the dividends earned.

 

[hamer]

@mariah36 It’s already accounted for (cells c17)

 

[tay1964]

@hamer How did you arrive at 0.72% TER for Option 2?

 

[hamer]

@tay1964 I calculated it based on historical data.

 

[tay1964]

@hamer Can you show that calculation? I still can't understand how MER of 0.02% become TER 0.72%

 

[hamer]

@tay1964

See Google sheet here for details.

https://docs.google.com/spreadsheets/d/1jpSIEXwzge2Q38D2YFyTuj1iwoNbmVoHxSuKZbDA9sI/edit?usp=sharing

see last sheet

 

[tay1964]

@hamer awesome, thank you!