Diversifying across industries, market capitalization, and asset classes is something that almost all investors practice while investing in Indian stocks. However, only a few investors actually diversify across borders. Firstly, due to lack of knowledge and secondly, due to higher minimum balance requirements, brokerage charges, RBI rules and taxes, people often tend to avoid international investing. However, there are different ways to invest in US equities and the US stock market from India without minimum balance requirements. For example, through mutual funds and a mobile app. This article covers why and how to invest in the US stock market from India in detail.
Why should you invest in the US Equities?
In the past decade, the US stock exchange has consistently outperformed the Indian stock market. During the same time, the returns from DOW have been 196%, while SENSEX gave 150% returns.
It is also important to track the currency fluctuations in addition to the equity returns. For the past decade, the Indian Rupee has depreciated almost 44% in comparison to the USD. Therefore, this will have a negative impact on the returns of the Indian stocks, hence widening the performance gap.
In addition to investing in the Indian stock market, one can invest in US stocks from India for geographical diversification. Global markets are a good way to diversify the investment portfolio. And the US market being a mature one helps investors in building a good investment portfolio. Also, the USA’s GDP is almost ten times that of India.
Defend against the rising dollar
In the last ten years, the Indian Rupee has depreciated almost 44% against the USD. Investing in the US stocks from India will expose the retail investor to currency exchange rate fluctuations. An investor who has invested in the US markets will earn significant returns by the depreciating rupee as well. Holding investment in foreign markets for long durations will certainly help in earning significant returns.
Invest in the world’s best companies
Most investors always wanted to invest in US companies that they love. For example, Google, Amazon, Facebook, NIKE, etc. Now a retail investor can easily do that through overseas accounts or mutual funds or ETFs, etc.
How to invest in the US Equities?
One can invest in the US equities either through Direct or Indirect Investment. However, before investing following are the documents required:
- Identity Proof – Any one of the following: Voter ID, PAN Card, Valid driver’s license, or Passport
- Address Proof – Any one of the following: Utility bills, mobile phone bill or bank credit card statement
Following are the different ways to invest in the US equities:
Direct Investment in Foreign Markets
Through direct investment, one can open an overseas trading account with either a domestic or foreign broker.
Open an overseas account with an Indian brokerage
Many Indian brokerage firms have tie-ups with US stockbroking firms. These brokerage firms act as intermediaries and execute trades on behalf of Indian investors. Therefore, one can open an overseas trading account with such a broker. For example, ICICI Direct, Reliance Money, Kotak Securities, are among few brokerage firms that enable Indians to open an overseas account.
The investor needs to submit the duly filled account opening form and the KYC documents.
Furthermore, they have to transfer the money through a domestic broker to the international partner. For this, certain forms and declarations have to be submitted to the authorised dealer.
Also, it is important to note that these brokerage firms have certain restrictions with respect to the number of trades, types of investment vehicles, etc. Furthermore, the cost of investing is usually higher, owing to the brokerage fees and currency exchange rate and conversion charges. Therefore, it is important to understand all the costs before opening the account.
Open an account with foreign brokerages
One can also open an overseas trading account directly with international brokerage firms who have their presence in India. For example, Ameritrade, Charles Schwab, are among some of the foreign brokers operating in India. However, it is essential to understand the brokerage/ fees structure and all the costs before buying stocks through these international brokerage firms.
Indirect Investment in Foreign Markets
For buying stocks in the US stock market, one need not open a brokerage account. Hence there is no minimum balance requirement and no brokerage costs involved. Following are the different ways of investing in US equities indirectly:
Buy Indian mutual funds
Indian asset management companies or fund houses invest in foreign stocks and mutual funds. One can choose to invest in these mutual funds that do not require any minimum balance requirement. Moreover, they need not go through the hassle of choosing the right individual stocks to invest. However, one has to check the expense ratio of these mutual funds before investing.
ETFs with global equities
Investing in international stocks through exchange traded funds is the easiest and most cost-effective way of diversifying globally. One can use either the direct or indirect route for investing in global exchange traded funds. They can either open a brokerage account with Indian or foreign brokerages. To invest indirectly in global ETFs, they can purchase an Indian ETF with international indices.
Investing Through a Mobile App
There are many online platforms and applications that allow Indian investors to invest in foreign stocks and mutual funds. They can start with an amount as low as $1. Moreover, these platforms give an option for the investor to make their own stock portfolio with individual stocks or use their advisory services. Some of these apps also offer a fundamental and technical analysis of international stocks.
Things to keep in mind while investing in the US Equities
Before investing in the US stock exchange, it is important to have good knowledge about the market. Also, investors should have the time and expertise to open and operate the overseas account. Before investing, it is important to analyse the market and economy to make informed investment decisions. Furthermore, a financial advisor always recommends to start small and gradually increase the investment. Once the investor gains an understanding of the global markets, it is advisable to increase their exposure.
Global investing is expensive in comparison to domestic investing. The account, brokerage, and currency conversion charges are usually higher. Therefore, it is important to understand all the charges that come with an overseas account, before opening and start investing.
Long term investing
Investing is always more cost efficient in comparison to trading. Similarly, one should aim at long term investing rather than trading in the US market. High trading account charges will reduce marginal profits. Therefore, long term investing with proper financial planning will earn significant returns over and above the charges.
Laws and Tax implications
While investing in US equities consider applicable taxes as per the US and Indian taxation laws. Taxes on investment gains will be taxed in India and not be withheld in the US. The tax implications depend on the investment holding period. Investments with an investment horizon of 24 months and above are taxable at long term capital gain rate of 20% with indexation benefit. For investments with less than 24 months holding period, the short term gains are taxable as per the investor’s income tax slab rate.
While dividends are taxable in the US at a flat 25% rate. Furthermore, the Double Taxation Avoidance Agreement (DTAA) between India and the US allows taxpayers to offset income tax already paid in the US. For the 25% tax paid in the US, the investor gets a Foreign Tax Credit. This can be used to offset the tax in India.
Global investing helps in diversifying one’s stock portfolio. With increased access to information and advanced technology, investing in global equities has become easy. Indian residents can consider international investing either through the direct or indirect method. However, before choosing one, it is highly recommended to consider the pros and cons of each method.
Investors have to also keep in mind their understanding of risk and currency conversion charges. Moreover, Indian residents have to consider the taxation rules of both India and the USA, and the minimum and maximum investment limit allowed by the Government. It is also advisable to consult a financial advisor before investing in US equities. As they can guide in financial planning and help choose the best investment vehicle that suits one’s goals and objectives.