Why are Indian mutual funds considered a tax trap for people living in the US?

Because they're almost always PFICs, and the US tax code treats PFICs harshly for residents. In India, equity mutual funds enjoy favorable long-term capital-gains rates and simple reporting. The moment you become a US tax resident, that flips: the same fund triggers the excess-distribution regime (top ordinary rates plus an interest charge), a separate Form 8621 per fund, and additional FBAR/Form 8938 disclosure. You can owe US tax on gains you haven't even cashed out under mark-to-market, and you lose long-term capital-gains rates entirely. Even "growth" funds that pay no dividends aren't safe — the trap springs when you sell. The practical fix is to hold globally diversified US-domiciled funds and ETFs instead, which avoid PFIC status and report cleanly on a 1099. If you already hold Indian funds, get specific guidance before selling.