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When investing, the most important rule to remember is to diversify. Diversification of investment portfolio is very important as it helps spread the risk and bring stability in the long term. While most investors are already diversifying their investments across asset classes, many are opting for geographical diversification. In other words, they are investing in stocks and securities of different countries such as the USA, Australia, and the UK. This article details how to buy the best US stocks for the long term and things to consider before investing in them.

What are US Stocks?

Companies that are incorporated in the US and are listed on the indices such as S&P 500, Nasdaq Composite, and Dow Jones Industrial Average are US stocks. Many global companies that you know have been incorporated in the US. Whether Tesla, Microsoft, or Apple, all have US origin and are listed on the US stock markets.

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How to Buy Best US Stocks for the Long Term?

A decade ago, investing in the US stock markets from India felt impossible. However, now things have changed. With so many options available, investing in US stocks is as easy as investing in the Indian markets. One can participate in the US stock market in two different ways.

  1. Direct investments: Buy the shares of companies listed in the US stock markets.
  2. Indirect investments: Invest in the US stock market indirectly through mutual funds and exchange-traded funds (ETF).

Direct Investment

To directly invest in the shares of a US company, one would need to open an overseas trading account with either a foreign or an Indian broker. 

  • Overseas trading account with a domestic broker: Domestic brokerages have tie-ups with US brokerage firms that facilitate trading in US stocks. Though this option gives easy access to US stock markets, the cost of investing is high. In other words, the brokerage fees and currency conversion charges tend to be on the higher side. Moreover, there can also be a restriction on the type of investment and number of trades. Additionally, some brokerages ask investors to maintain a minimum balance in the trading account.
  • Overseas trading account with a foreign broker: Foreign brokerage firms that have a presence in India also allow Indians to invest in US stocks. There are no restrictions on the type of investment or number of trades in this trading account. However, there is still a risk of high brokerage fees, currency conversion charges, and high minimum balance requirements.

Indirect investment

Another way to get exposure to US equities is to invest in mutual funds and ETFs that invest in US stocks.

  • Mutual funds: Many funds are available that invest in stocks and securities of global companies. These are called international funds. This is the easiest way one can get access to US stocks. All one has to do is invest in them through any fund house or mutual fund platform. This option has no additional brokerage charges, currency conversion charges, or a minimum balance requirement. 
  • ETFs: Investing in US ETFs or Indian ETFs that invest in US indices can give access to US stock markets. One can easily invest in ETFs through a foreign broker, or Indian broker, or an Indian mutual fund house. However, before investing, it is always advised to check the brokerage fees, and conversion charges and choose the one with the least expenses. 
  • New age apps: Many start-ups have made investing in US stocks possible through mobile applications. However, due to regulatory restrictions, trading is limited on such apps.

Things to Remember Before Investing in US Stocks for the Long term

Before investing in US stocks for the long term, every investor has to consider a few parameters.

1. Financial knowledge and expertise

As an investor in a whole new stock market, it is important to understand how it works. One needs to understand the nitty-gritties of the US market and global investing. Investing only if one has the time and knowledge to analyse the market is always better. 

2. Cost of investment

The cost of investing in the US market is way above the Indian market. There are bank charges such as foreign exchange conversion, account opening, and transfer fees. Apart from this, brokerages charge a fee on transactions. Moreover, as per the Liberalised Remittance Scheme (LRS) by RBI, a tax collected at source (TCS) of 5% is charged on the amount above Rs 7 lakhs. However, it can be claimed while filing income tax returns. All these charges can eat into the returns, and investors might earn less if these are not managed properly. 

3. Exchange rates

The exchange rate risk is always present when investing in international markets. This can impact the investor when investing or withdrawing the investments. It is usually advised to keep the investment in foreign currency even after withdrawal, as it can be used for travel, education, or other international investments.

4. Taxation of gains and dividends

Capital Gains and dividends earned through investing in US markets attract taxes. The dividends are taxed at a flat 25%, and the long-term capital gains (gains earned after 24 months from investing) are taxable at 20% in India. However, no tax is levied on them in the US.

The short-term capital gains (gains on stocks held for less than 24 months) are taxable at the investor’s income tax slab rate in India. If the company in the US charges Tax Deducted at Source (TDS), then the same can be claimed while filing tax in India. This is because India has double tax avoidance agreements with over 88 countries, including the USA.

5. Investing for the long term

When investing in the US market, it is always better to invest for the long term as it is more cost-efficient. This is because frequent transactions in short-term investing will increase the cost and ultimately reduce the returns.

6. Investment amount

Until the investors understand the US market, investing a small amount is better. Once the investors get the hang of it, they can increase the investment amount gradually. 

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