Does It Make Sense to Invest in U.S. Equity Funds Amid Market Volatility?

Against this backdrop, when the U.S. in the endeavour to Make America Great Again (MAGA), certain investors are showing keen interest in U.S.-oriented Equity Mutual Funds, -- be it the U.S. Equity Opportunities Funds, U.S. Blue-chip Funds, U.S. Focused Equity Funds, U.S. Fund of Funds, etc.

The allure of the U.S. equity market lies in the presence of numerous large and highly successful businesses, including the Magnificent 7 (Microsoft, Alphabet, Apple, Nvidia, Tesla, Meta Platforms, and Amazon.com).

The Indian Rupee (INR) has dropped 2.8% against the U.S. Dollar (USD) so far in 2025, and further depreciation cannot be ruled out amidst trade wars.

In such a scenario, investors are perhaps expecting potential outsized returns in the U.S. to compound returns with Indian mutual funds investing in U.S. stocks.

The U.S. economy has also fared remarkably well and shown exceptional resilience over the past five years.

In the aftermath of the COVID-19 pandemic, economic growth in the U.S. outpaced that of the U.K., France, Germany, and other G7 nations.

Just before election day, a story from The Economist described the U.S. economy as "the envy of the world," stating it had "left other rich countries in the dust."

In CY 2024, the U.S. equity market witnessed a remarkable rally as the S&P 500 gained 23.3% absolute returns, building on the gains of 24.2% clocked in 2023. The Dow Jones Industrial Average (DJIA) -- which measures 30 U.S. blue-chip companies and covers all the industries except transportation and utilities -- gained 12.9%, while the tech-heavy Nasdaq 100 gained 28.6%.

The Graph below shows that since the lows of the COVID-19 pandemic, the U.S. equities have multiplied investors' wealth manifold.

The U.S. equity market, however, of late, has now hit a rough patch. The S&P 500 has been pushed into its first correction since late 2023. As of March 14, 2025, the S&P 500 is down more than 10% from its February 19, 2025 peak, while the Dow has tumbled 9% from its December 2024 peak.

As per Dow Jones market data, this has been the quickest peak-to-correction movement since the six trading days at the onset of the COVID-19 pandemic in March 2020.

Investors have witnessed a staggering USD 5.28 trillion wipeout in merely three weeks - that's a bloodbath.

Why Is the U.S. Equity Market Volatile?

One of the biggest factors behind the market downturn is U.S. President Donald Trump's protectionist policies and tariff tantrums.

When Trump won the election in November 2024, the markets had rallied as investors anticipated a boost from his campaign promises of tax cuts and a looser regulatory approach.

However, since he assumed office as the 45th President of the United States, Trump's policies have centred around imposing tariffs and tightening visa rules for immigrants, leading to worries about economic headwinds.

For starters, Trump has imposed 25% tariffs on all steel and aluminium imports. He has also imposed 25% tariffs on other imports from Mexico and Canada (with some exceptions) and a 20% levy on Chinese goods.

In retaliation, Canada and the EU have put tariffs on American exports worth billions of dollars, sparking concerns of a global trade war.

In the latest sally, Trump has threatened a new 200% tariff on European alcohol, unless the EU rolls back on the "nasty" tariff announced on U.S. whiskey.

The constant back and forth has rattled investor confidence amid the fear of Trump's policies and rising trade tensions triggering a recession.

The OECD (Organisation for Economic Co-operation and Development) has stated that investment and household spending are being hit by the higher trade barriers and "increased geopolitical and policy uncertainty".

In their latest forecast, the OECD has downgraded U.S. growth forecasts to 2.2% this year and 1.6% in the next, from 2.4% and 2.1% respectively.

The World Bank expects the U.S. GDP growth to slow to 2.2% in 2025 and 1.6% in 2026. According to the International Monetary Fund's (IMF's) estimates, the U.S. economy is expected to grow at 1.9% in 2025 and 1.8% in 2026.

With the uncertainty surrounding Trump's trade policies, the U.S. Federal Reserve is expected to hold interest rates steady, which again does not bode well for the U.S. economy or the Wall Street sentiments.

Trump's mercurial leadership is not the only contributor to the market volatility. The U.S. leadership in Artificial Intelligence (AI) has been challenged by the launch of DeepSeek, leading to a dumping of tech stocks.

Should You Invest in U.S. Equity Funds Now?

Let's take a quick look at how the Indian mutual funds investing in the U.S. equity markets through active management strategies have fared on returns over the past 1, 3, 5 and 7 years.

As you can see in the table above, most U.S.-oriented equity mutual funds, have clocked decent historical returns in the last 1 year, 3 years and 5 years and in many cases even outperformed the benchmark indices. But that was in the past when the going seemed good.

At present, given the headwinds arising from Trump's tariffs, geopolitical tensions, fears of a global trade war, chances of inflation inching up going forward, and in anticipation of the Federal Reserve keeping interest rates unchanged, and a potential economic slowdown in the U.S., it would be prudent to refrain from investing in U.S. Equity Funds now.

If you, the investor, already hold some U.S.-oriented Equity Funds in your portfolio, avoid adding similar funds at this time. From a geographical diversification point of view, have no more than 10% exposure to such funds and make sure that are not a part of your core equity mutual fund portfolio.

[Read: Do You Have Overlapping Mutual Funds in Your Portfolio? Here's What You Need to Do]

It is important to have a very high-risk appetite, the ability to bear the volatility and risks associated with overseas investments, and a time investment horizon of at least 7-8 years when taking geographical exposure.

Ideally, amid volatile market conditions, review your portfolio seeking the services of a SEBI-registered investment advisor and ensure that it is essentially well-diversified comprising mainly some of the best and most suitable domestic equity mutual funds.

To Conclude...

In the light of ongoing volatility in the U.S. equity market and persistent geopolitical uncertainties, exercising caution while investing in U.S. Equity Funds is advisable.

If you already hold such investments, reach out to your investment advisor for a mutual fund portfolio review, who will do so by assessing your current risk profile, investment objective, the financial goals you are addressing, investment horizon, and the best-suited asset allocation for you.

Be thoughtful in your approach.

Happy investing!

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Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.