Investing is no longer confined to the borders of a country. One can now invest across borders with international trading accounts. One of the first choices while diversifying one’s portfolio geographically is the US Stock Market. It is one of the most developed countries and is home to global multinationals and technological giants. Moreover, the US Stock Market has a very low correlation to the Indian Stock Market, making it an attractive alternative for investing. However, before investing in the US Stocks market, there are certain things to consider. This article covers why to invest in the US Stock Market and the points to consider before you invest in US stocks from India.
Why Invest in US Stocks from India?
The US Stock Market has an extensive list of opportunities to invest in. The market is not just limited to shares, bonds, derivatives but also has financial securities that aren’t present in the Indian market. Following are the reasons why one should consider investing in the US Stock Market.
Invest in the leaders of major industries
India has major multinationals, but it isn’t home to the best companies in the world. The US Stock Market allows investors to invest in Microsoft, Google, Apple, Facebook, and Netflix shares. All these companies’ shares aren’t listed on Indian stock exchanges. Hence investing in the US Stock Market will give access to investing in these companies.
Diversifying across asset classes will help spread out the risk of investing. However, the portfolio is still prone to countrywide political risks and economic risks. Any negative change in the country’s GDP and economic policies and conditions will put the investment portfolio at risk. Investing overseas will help diversify the geographical risk in the portfolio. Hence, investors can reduce the impact of domestic factors on their portfolio.
In the long term, the rupee has depreciated against the dollar. The USD is a safe haven for most countries, including India, and the same has been proved during the pandemic when Indian Rupee depreciated against the US Dollar. Investors can profit from a depreciating rupee as the overall portfolio return increases when money is pulled out after a fall in the value of the Rupee.
Mitigating Foreign Exchange Risk
With changing times, most Indian consumption has turned global. Be it travel, or studying abroad or doing business, expenses in foreign currency have increased. By having investments in foreign currency, a pool of global currency is created hence reducing the risk of foreign exchange.
Owning Fraction of Shares
The US Stock Market has a unique feature that allows investors to own a fraction of shares. Some of the big companies in the US have shares worth $2000 or more. Investing such huge amounts seems impossible for small investors, even in the US. However, the US Stock market allows investors to trade in fractions, and an investor can end up buying even half a share of a company.
Points to Consider Before Investing in US Stocks
Following are the 7 points one has to consider before investing in US Stocks from India and their stock markets:
1. The Liberalized Remittance Scheme
The RBI’s Liberalized Remittance Scheme allows Indians to remit up to $250,000 per year. This includes investments and expenses. Hence, investors can invest in any US financial securities, real estate, deposits, etc. They can also spend the money on travel and other expenses. Hence investors have to plan out their expenses and investments in USD within the limit of $250,000 per annum. Furthermore, any amount beyond $250,000 would require RBI’s permission.
2. Geographical Diversification
The US Stock market is not only home to US companies, but it also allows investors to participate in the global companies. Major global companies from China, Germany, Japan, etc., are listed on the US Stock Exchange. Moreover, few ETFs of the US Stock Market invest in global companies giving Indian’s access to companies all over the world.
3. Foreign Exchange
Foreign exchange risk is one of the most important points to consider while investing in US Stocks from India. The impact of currency rates and foreign exchange on a geographically diversified portfolio is high. While investing in the US market, a depreciating rupee will result in a lesser investment. On the other hand, while withdrawing investments from the US during rupee depreciation will increase the overall portfolio return. Also, a depreciating USD will reduce the return of the portfolio. Moreover, while converting INR to USD and vice versa may include conversion charges. Hence investors have to keep the foreign exchange risk in mind before investing.
Taxation is always an important parameter to consider before investing in any asset. While investing in foreign countries, it is important to understand the tax implications. India has a Double Tax Avoidance Agreement (DTAA) with the USA which prevents double taxation of the same income.
The USA Stock market investments attract the following two types of taxes:
For foreign investors, the US stock dividends are taxable at a flat rate of 30%. However, as per the tax treaty between India and the US, the tax rate for Indian resident investors is 25%. It is deducted before the distribution of the dividend. Indian investors can claim this tax as Foreign Tax Credit while filing their domestic filing.
Capital Gains Tax
The United States doesn’t have capital gains tax for investments. However, investors are liable to pay tax on foreign capital gains in India.
- Long Term Capital Gains Tax (LTCG): Capital gains from holding investments for a period of more than 24 months attract LTCG Tax of 20% with indexation benefit. Applicable fees and any other surcharges are additional.
- Short Term Capital Gains Tax (STCG): Capital gains from holding investments for a period of more than 24 months attract STCG Tax. The gains are taxable as per the investor’s applicable income tax slab rate.
Additionally, investors must also consider Tax Credited at Source (TCS). As per this new rule, all foreign remittances above INR 7,00,000 per annum (fiscal year) will incur 5% TCS. This is an upfront tax that is collected, and investors can claim it during the annual tax filing. Also, TCS is not an additional expense to the investors.
5. The US Regulatory Authority
The US stock market is among the oldest, transparent, most efficient and well-regulated markets across the globe. It lists some of the largest companies by market capitalization, profits and revenue. The Securities and Exchange Commission (SEC) is a regulatory body that oversees the functioning of the US stock markets. The SEC ensures strict regulations and law enforcement. Its highest standards of transparency and integrity protect the investor’s confidence.
6. Investor’s Goals
Another aspect to consider before investing in the US stocks market is the investor’s goals. Life goals are an important aspect of everyone’s financial planning. Defining goals such as studying abroad or relocating, or travelling, etc., will help in planning investments. For all foreign goals, one should invest in products that will help them achieve their goal easily. For example, if an individual plans to save for their child’s foreign education, then their portfolio should reflect that expectation. Properly planning and diversifying the investments will help in generating significant returns.
7. Other Charges/Fee
Through a US brokerage account, one can invest directly in US stocks from India. There are many platforms that offer these accounts. However, they charge a certain fee per trade, joining fee, and annual maintenance charges. Therefore, one should be well aware of all such costs with respect to this account. Investors can directly fund the brokerage account from their bank account. Also, the transfer and foreign currency conversion charges vary from bank to bank.
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