Several factors drove this performance. Surging mega-cap technology and artificial intelligence (AI)-driven stocks emerged as a major engine of returns. “Strong earnings, resilient economic growth, and supportive Fed policy also helped deliver robust double-digit returns across growth, value, and diversified U.S. equity funds over the past year,” says Trideep Bhattacharya, president and chief investment officer (CIO)-equities, Edelweiss Asset Management.
Spending by companies like Microsoft, Amazon, Google, and Meta on AI infrastructure rose from around $158 billion in 2022 to an estimated $653 billion in 2026. This AI-led capital expenditure boom by hyperscalers boosted US equities. “Suppliers of chips, racks, power infrastructure, cooling systems, fibre, and data centre services also benefited from this spending cycle,” says Rahul Bhutoria, director and co-founder, Valtrust.
The rupee has depreciated by 8.9 per cent against the US dollar over the past year. “Indian investors in US-focused funds have benefited from this tailwind,” says Bhutoria.
Can such high returns continue?
Returns may remain strong in the near term if several tailwinds continue to align. “Continued earnings growth, a supportive Federal Reserve stance with rate cuts, and sustained AI-driven momentum may support performance,” says Bhattacharya.
Continuing AI infrastructure build-out may support select pockets of the market. “Average capex across US industries is projected to rise about 8 per cent in 2026. While AI data centres are leading this, the spending is broadening to include power grids, copper supply chains, automation, and utilities,” says Bhutoria.
Lower-tech manufacturing is also witnessing a revival in the US.
What could derail performance?
Several factors could make it difficult for such returns to recur. “Elevated valuations could prevent a repeat,” says Bhattacharya.
A pullback in AI capital expenditure appears to be the single biggest risk. “Unclear returns on AI investment could prompt large technology companies to cut spending,” says Bhutoria.
A resurgence of inflation could keep policy tight. Prolonged high interest rates could weigh on valuations and multiples.
Bhutoria says that delayed rate cuts could weaken consumption and real estate, two of the largest components of the US economy.
A potential U.S. recession, earnings downturn, and geopolitical flare-ups could affect returns, according to Bhattacharya.
A liquidity crunch in the private credit market could spill over into broader markets. Rising US debt could alter bond market dynamics and constrain future policy choices.
“Tariff uncertainty adds unpredictability to business planning, supply chains, and corporate earnings,” says Bhutoria.
Most vulnerable segments
Some segments of the US market appear more vulnerable than others. “Highly valued mega-cap technology and AI-driven growth stocks look most vulnerable. Their lofty valuations leave them exposed to negative surprises or policy tightening,” says Bhattacharya.
Rate-sensitive discretionary spending areas, such as appliances, automobiles, and home improvement, are already showing stress.
Real estate will remain depressed if rate cuts continue to be deferred. “Food and agriculture-linked stocks face margin pressure from elevated input costs,” says Bhutoria.
Beginners should prefer a low-cost US-focused index fund or exchange traded fund (ETF) that invests in a broad index such as the S&P 500, Nasdaq, or some other broad index. “Prefer broad market index or multicap funds over thematic or concentrated funds to diversify risk,” says Prasanna Pathak, deputy chief executive officer (CEO), The Wealth Company. Expense ratio and tracking efficiency matter, particularly in passive funds.
Only after gaining some investment experience should investors move into active funds, provided they have the risk appetite. “A fund should ideally be more than three years old, have sizeable AUM, and demonstrate consistent performance,” says Ankur Punj, managing director and business head, Equirus Wealth.
Pathak says that investors should watch for concentration risk, since many funds remain heavily skewed towards sectors such as technology.
Limited funds open for subscription
One point that investors should keep in mind is that the regulatory limit of $7 billion on overseas investments by mutual funds can affect investors. Only a few US-focused funds are open for inflows at any given point. Pathak points out that fresh subscriptions can be stopped temporarily, especially lump sum investments, and SIPs can be paused or restricted.
Less favourable taxation
The tax treatment of US-focused funds is less favourable than that of domestic equity funds. They are treated as non-equity funds for taxation purposes. “Gains are treated as long term after 24 months and are taxed at 12.5 per cent. Short-term gains are taxed at the slab rate,” says Punj.
Also, dividends face 25 per cent US withholding tax, which can be claimed as a credit in India.
Advice to existing investors
Existing investors should maintain a disciplined long-term approach. “They should continue systematic investment plans (SIPs) rather than attempt to time the market,” says Bhattacharya. He suggests that existing investors should consider partial profit-booking for rebalancing if US equity exposure has moved beyond the target allocation.
Advice to new investors
Geographical diversification remains a prudent strategy for Indian investors. “The U.S. remains the deepest and most innovation-intensive equity market in the world,” says Gaurav Kulshreshtha, CIO, Nexedge Capital.
“About 20-25 per cent of equity allocation should be invested outside India for market and currency diversification, with the US accounting for a large part of the international allocation,” says Punj.
The US market is no longer cheap, though experts do not think it is in a bubble-like situation. New investors should treat US exposure as a long-duration allocation. “Investing in US-focused funds solely because they have outperformed Indian markets over the past 18 months can amount to a mean-reversion trap,” says Punj.
Maintain a seven- to 10-year investment horizon for US-focused funds. “A longer horizon will reduce the impact of rich entry valuations,” says Punj.
Kulshreshtha suggests that new investors should split their target allocation over 18-24 months through SIPs or systematic transfer plans (STPs).
Finally, new entrants should also moderate their return expectations. “They should treat the first two to three years as a base-building period, during which dollar returns could remain muted or even negative,” says Kulshreshtha.
The writer is a Mumbai-based independent journalist