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If I had $1000 to invest, am I better off investing it in the US, in India, or a mix of the two?

I am an Indian citizen working in the US, with the option of investing in US index funds or sending money back to India to invest in Indian mutual funds. At the moment, I intend to return to India in 5-10 years.

What's the better option for a long-term saving strategy?

Key factors I have thought about making the decision:

  • Currency conversion loss of 1% converting USD to INR
  • Currency Power: Historical depreciation of INR against USD
  • Bank deposit Interest Rates: 1.8% in US savings accounts vs. 7% in India
  • Inflation rates: 2% in US vs 5% in India
  • Index/Mutual fund returns: ~15% in India vs ~10% US (5-yr avg based on S&P 500 vs Axis Long Term Equity fund)

I am unable to make a clear decision since:

  • I don't understand how the factors above relate to each other
  • I don't have a framework for comparing the two investments
  • What is India capital gains tax rate? – mootmoot Oct 15 at 8:38
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There are 3 main arguments for why you should concentrate your investments in the US rather than holding international funds, they are covered in greater detail here. But broadly speaking they boil down to:

  1. Added risk - currency risks and a lower level of transparency in relation in the market tend to make international funds riskier investments. The US has one of the most heavily regulated investment industries in the world. Fewer regulations make you more vulnerable to fraud and corruption.

  2. Added expense - The MER on a Vanguard total US stock market ETF is 0.03% You're not going to find a better deal than that anywhere.

  3. US companies are international companies - All of the top US companies are already international in scope, and many of them make more than 50% of their profits overseas. By trading in US funds, you actually already own a big chunk of the world economy.

In regards to your final point about returns ("Index/Mutual fund returns: ~15% in India vs ~10% US (5-yr avg based on S&P 500 vs Axis Long Term Equity fund)") I would just point out that both countries there were recovering from the 2008 financial crisis at the time. Understanding how a country performs in a Bullish market is important, but you also need data on how it does in a Bearish market - How big was the drop for India in 2008?

  • And currency risk. Sure, the Indian market is up 15%, but what's the inflation rate and the trend in INR:USD exchange? – RonJohn Oct 15 at 13:55
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In addition to the points you raised, you should also consider that most (if not all) Indian mutual funds will not accept investments from an individual living in the US, because of IRS reporting regulations

  • There are US ETF's he could purchase, within the US, that hold index of Indian funds? – paulj Oct 15 at 12:01
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A mix.

Diversification is good.

More diversification is better.

The US market is larger than the Indian market, so you should invest more money into US market and less money into Indian market. But of course do invest some of your money into Indian market, as well.

Don't forger other markets, too: Europe, Japan, Korea, China, etc.

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