Indian investors face a pressing dilemma, as a significant proportion of their international exposure is disproportionately concentrated within US equities, predominantly in Nasdaq-centric funds.
While engagement with the world’s preeminent economy holds considerable significance, the prevailing market landscape advocates for a broader perspective on global diversification.
Investors are encouraged to resist the temptation to tether their portfolios to a singular market or theme.
The Ascendancy of Mega-Cap Companies
The recent rally in the US stock market has emerged as an increasingly narrow phenomenon, predominantly driven by a select cadre of AI-centric mega-cap enterprises.
Defined as corporations with market capitalizations exceeding $200 billion, ten US companies now command market valuations of over $1 trillion each. Prominent examples include Nvidia Corp., Apple Inc., Alphabet Inc., Microsoft Corp., and Meta Platforms Inc.
In the past three to four years, these entities have experienced meteoric growth, propelled by robust investments in data centers, semiconductors, and technological infrastructure. This unprecedented concentration raises concerns regarding market stability.
“AI-centric firms accounted for nearly 80% of US equity gains in 2025, with the five leading mega-caps constituting about 30% of the S&P 500 and 20% of the MSCI World Index, marking the highest concentration in nearly half a century,” remarked Ankur Punj, managing director and business head at Equirus Wealth.
Currently, the US technology sector represents approximately 35% of the total US market capitalization, while the ten largest US firms make up over 20% of global equity value.
This dominance is unparalleled in historical context and elicits concerns that returns may be hinging merely on an increasingly constricted segment of the marketplace.
Punj further noted that the S&P 500 is trading at around 23 times forward earnings, suggesting a valuation environment that is among the most stretched relative to other global markets since the dot-com era.
Anticipated capital expenditures related to AI are projected to reach $390 billion by 2025, highly concentrated among a select few firms, contributing to what Punj dubs a “circular AI economy.”
Indicators of a Market Bubble
Despite these lofty valuations and skewed market structures, many analysts maintain that the US tech sector is not in a definitive bubble, at least not in the traditional sense.
Raunak Onkar, head of research and fund manager at PPFAS Mutual Fund, pointed out that while specific segments of the US market may appear expensive based on historical standards, not all companies have enjoyed a commensurate rise in cash flows to support their inflated valuations.
“Some enterprises have seen valuations spike due to a surge in short-term performance linked to AI demand, but this does not universally apply,” he noted.
Onkar advised caution in labeling the entire US tech landscape as a bubble, as some companies continue to generate healthy cash flows that sustain their growth trajectories.
Supporting this view, a recent report from Deutsche Bank posits that the upsurge in AI-induced valuations is accompanied by genuine earnings growth and substantial profitability, a notable divergence from previous bubbles fueled by dubious business models and unrealistic expectations.
The Perils of Overreliance
Onkar cautioned against pursuing trends solely due to rising stock prices, underscoring that the consequences of the US rally differ substantially for Indian investors compared to their American counterparts.
Both Punj and Onkar contended that the crux of the issue lies not in the exposure to the US itself, but in an overreliance on a singular market and thematic approach. A narrow market rally, inflated valuations, and currency fluctuations amplify the associated risks.
Punj elaborated on the dual-layered risk faced by Indian investors during a US market correction. “A downturn in US markets triggered by an AI correction could lead to falling stock prices, prompting capital outflows from the US and consequently weakening the dollar against the rupee, negatively impacting Indian investors on multiple fronts,” he warned.
Onkar further emphasized that a diversified approach to international investing is paramount, rather than an exclusive focus on the US. He noted that many Indian investors lack meaningful allocations to other global markets when forming their global exposure.
Exploring Markets Beyond the US
Representing half of the global market capitalization, the US cannot be entirely omitted from a diversified global portfolio. However, Onkar indicated that investors must recognize the importance of the US markets within that diversified framework.
“Constructing global exposure requires acknowledging the US as a fundamental component, while solely viewing investments through a US/non-US lens may hinder participation in rapidly growing sectors,” he explained. Notably, numerous innovative firms are listed in the US while deriving revenues from around the globe.
Nevertheless, valuation opportunities beyond US borders appear increasingly favorable. Punj identified Europe and Japan as promising regions, with Europe providing broad exposure to cyclical sectors, industrials, and consistent dividend-paying entities that have notably underperformed relative to US valuations.
Japan, despite its commendable performance, continues to reveal the benefits of corporate governance reforms and enhanced shareholder returns, with valuations remaining attractive across various previously overlooked sectors.
The apprehensions surrounding a potential technical recession have dissipated, bolstered by ongoing reform efforts.
Recent analyses from JP Morgan and Goldman Sachs indicate that Japanese equities are experiencing a structural re-rating, driven by increasing dividends, record buybacks, and enhanced board independence, marking a meaningful departure from previous economic stagnation.
In the realm of emerging markets, Brazil stands out as particularly appealing. Punj noted that Brazil trades at low-teen price-to-earnings multiples while capitalizing on commodity demand and undergoing structural reforms, alongside heightened foreign investment.
Taiwan and Korea also present exposure to the global semiconductor supply chain, albeit with greater volatility and susceptibility to US tech sentiment. Punj advocates that Indian investors diversify across developed markets like Europe and Japan, with a modest allocation to emerging markets.
“Retail investors should confine international allocations to 20% of their overall portfolio, with a focus on Europe and Japan at 80%, leaving 20% for emerging markets like Brazil,” he advised.
Diversification via Mutual Funds
Interestingly, data from mutual funds reveal that Indian investors are already initiating rebalancing toward alternative geographies. Several international funds outside the US have witnessed remarkable growth in assets under management (AUM).
The Invesco India-Invesco Global Equity Income Fund of Fund saw AUM soar from ₹25 crore in December 2024 to ₹170 crore by October 2025, representing a staggering 580% increase.
Similarly, the Axis Greater China Equity FoF experienced a 488% surge in AUM, reaching ₹1,501 crore during the same timeframe. These developments indicate a burgeoning willingness among investors to explore opportunities beyond US-centric products.
Onkar reiterated that even outside the US, there exist pockets of both expensive and reasonably priced enterprises. “Valuation prospects are evident universally, even in markets perceived as collectively overvalued,” he stated.
Subsequently, rather than concentrating on individual countries, he advocates the utilization of multi-geography ETFs, which offer immediate diversification without necessitating close attention to individual stocks across various continents.
Saurabh Mittal, CFA and founding director at Circle Wealth Advisors, mentioned that most client portfolios typically maintain 10% to 15% international exposure.
However, following the pronounced US rally in recent months, the allocation to US funds has naturally escalated. “We are currently focused on rebalancing those allocations to return to desired levels,” he clarified.
There is also a noticeable shift of capital from US-specific funds to broader global indices, such as the MSCI World Index. “However, one must note that even within the MSCI World Index, US stocks constitute approximately 75%.
Hence, investors cannot escape the impacts of US market fluctuations,” he remarked. The MSCI World Index captures a substantial representation of large- and mid-cap stocks across 23 Developed Market nations.
Mutual Funds vs. ETFs
A consensus among experts holds that India-domiciled international mutual funds and exchange-traded funds (ETFs) remain the most straightforward and relatively secure avenues for Indian investors seeking global exposure.
Punj emphasized their inherent advantages: superior risk management, simpler taxation, transparent structures, and the avoidance of complexities associated with directly owning foreign stocks.
Onkar added that the art of stock-picking in international markets necessitates comprehensive research and monitoring, which can be challenging for most retail investors.
Both Punj and Onkar underscored the importance of a methodical approach to investments, as accurately forecasting corrections or bubbles is impossible. A long-term perspective and systematic investing constitute the most reliable strategy for success.
Despite this, with domestically domiciled ETFs currently trading at a premium, it might not be the optimal time for new investments through these vehicles.
Rushabh Desai, founder of Rupee With Rushabh Investment Services, noted that valuations within US equity markets, particularly in the tech sector, have become expensive.
Owing to restrictions by the Securities and Exchange Board of India regarding overseas mutual fund inflows, many ETFs are trading at atypically high premiums.
He posits that Indian markets presently offer superior risk-adjusted opportunities. “Now is the strategic moment to concentrate on domestic markets, where returns have been subdued, and numerous sectors are characterized by reasonable valuations,” he asserted.
Investing through mutual funds, whether actively managed or index-based, provides distinct advantages in terms of risk, return, and liquidity for retail investors.
If one aspires to venture abroad, considering outbound retail funds and ETFs available through platforms like Vested Finance and IndMoney could be prudent.
Experts also caution that pursuing US tech stocks following an extensive AI-driven rally may prove detrimental; fear of missing out (FOMO) can precipitate poor investment choices. As Onkar aptly noted, investing should prioritize goals over excitement.
Given the significant influence of the US on global markets, a more expansive and balanced approach to global diversification through mutual funds offers a safer, long-term investment trajectory.
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