How to Invest in the S&P 500 from India?

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Article Content

What is S&P 500?
Meaning of S&P 500 Index Fund
Who Should Invest in S&P 500 Index?
How to Invest in the S&P 500 from India?
Conclusion

What is S&P 500?

The S&P 500 is a US Stock Market index that contains the top 500 largest publicly traded companies. It was introduced in the year 1957 by Standard & Poor. This index follows the market capitalisation weighted method and selects the top 500 companies. The company with higher market capitalisation is given higher weightage for selection. However, market capitalisation is not the only criterion for selecting companies for the index.

The formula for weighted market capitalisation is –

Weighted Market Capitalisation in S&P = Total number of outstanding shares X market price of the share.

There are several other factors also considered for selecting companies. An S&P committee is appointed to select stocks based on industry, liquidity and size. Also, the index is rebalanced every March, June, September, and December. To qualify for the S&P 500, the company must be present in the USA and have an unadjusted market capitalisation of at least $8.2 billion. Furthermore, 50% of the shares must be available to the public for trading, and the company share price should be at least $1. Moreover, 50% of the fixed assets and revenue should be in the U.S. These companies must also have four consecutive quarters of positive earnings. In addition, shares, debentures, bonds, mutual funds, REITs, equity derivatives like options, and futures all trade on S&P 500.

S&P 500 is one of the oldest and most popular market indices having 63 years of track record and being followed globally. Not only U.S. investors but investors from other countries can also invest in S&P 500 companies through various index mutual funds and ETFs.

Meaning of S&P 500 Index Fund

An index fund is a type of mutual fund where the portfolio composition replicates the stock market index (e.g., NIFTY 50, NASDAQ, etc.) Similarly, an Exchange Traded Fund (ETF) is a basket of securities that matches the underlying stock market index. Therefore, both these funds try to replicate the returns generated by the stock market index.

S&P 500 Index Fund is an index mutual fund or ETF where the portfolio will track the S&P 500 as the benchmark index. These funds provide investors access to securities offered by this stock market index. Also, these funds have low fees and are passively managed by fund managers because they only have to adjust their holdings when the benchmark index changes.

Who Should Invest in S&P 500 Index?

Investing in this index is suitable for investors looking for a diversified investment portfolio through foreign equity markets. This index allows investors to hold a stake in hundreds of stocks by investing in one index fund. Also, with a broad collection of companies, this market index lowers the risk through diversification. Furthermore, investing in S&P 500 through an index fund is simple and easy as it requires little time than buying individual stocks. It is also a low-cost affair as it is a passively managed fund.

Investors must be comfortable with fluctuations in foreign markets, which can affect their investment value. Such investors must have a proper understanding of risk and have a long-term investment horizon while seeking exposure through foreign indices. Therefore, investing in this index gives investors exposure to sectors, industries, and market caps of the U.S. market. Staying invested for the long term helps to overcome market volatility and generate substantial returns.

How to Invest in the S&P 500 from India?

You can invest in S&P 500 either through direct or indirect investment. The following are the ways to invest to invest in this index from India –

Direct Investment

Direct Investment means you directly buy stocks listed on the S&P 500 index. To buy these stocks, you need an overseas trading account which can be opened with a domestic broker or foreign broker

Open an overseas account with an Indian broker

There are many Indian brokerage firms that have tie-ups with U.S. stockbroking firms. The Indian brokerage firms act as intermediaries and execute the trade on behalf of Indian investors. Therefore, you can open an overseas trading account with such a broker. Some Indian brokerage firms are ICICI Direct, Reliance Money, Kotak Securities, which enable Indians to open an overseas account.

As an investor, you must submit a duly filled account opening form and KYC documents. Furthermore, the firm transfers money to the international partner. There are certain declarations and forms to be submitted to the authorised dealer. Moreover, it is important to note that these brokerage firms have certain restrictions on the number of trades, type of Investment, etc. Also, the cost is usually higher due to the brokerage fees, currency exchange rate and conversion charges. Hence, you must know all these charges before opening an account and executing a trade for S&P 500 stocks.

Open an overseas account with a Foreign broker

You can directly open an overseas account with an international brokerage firm who have a presence in India. Some of the foreign brokers operating in India are Ameritrade, Charles Schwab. However, before buying stocks through these firms, you must understand the brokerage fees/structure and other costs.

Indirect Investment

The following are ways to invest in S&P 500 index indirectly –

Index mutual funds/ ETFs

There are many AMCs or mutual fund houses that invest in S&P 500 index. The objective of an index fund is to mimic the performance and portfolio of the S&P 500 index. You can choose any of these mutual funds that invest in S&P 500 as their benchmark index and get exposure to stocks of S&P 500. The benefit of investing through mutual funds is that you can start with a small amount of Rs.500 to invest. Moreover, you need not go through the hassle of selecting the right individual stocks to invest in. However, you must check the expense ratio of these funds before investing.

Some of the index mutual fund/ETFs that follow the S&P 500 index are –

Motilal Oswal S&P 500 Index Fund
Mirae Asset S&P 500 Top 50 ETF
S&P 500 Vanguard ETF – This is an international mutual fund where Indian investors require an international trading account to invest.

Through Mobile App

There are many online platforms and applications that allow Indian investors to get exposure in foreign stocks and mutual funds. You can start with an amount of $1. Also, these platforms give you an option to make your own stock portfolio with individual stocks or use their advisory services.

Conclusion

Investing in this index helps to diversify your portfolio. With increased access to information and advanced technology, investing in foreign markets has become easy. Indian investors can consider investing in the international market either directly or indirectly. But before choosing, you must consider the pros and cons of each method. Also, it is essential to understand the risk associated with investing in foreign indices and currency conversion charges.

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