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While considering diversifying across geographies, US markets have been one of the top choices for investors. The US market has become a home for some greatest technology and potential wealth-creating businesses. There are different ways for an investor in India to invest in the US stock market. They can invest directly in US stocks or indirectly through mutual funds or ETFs.
Exchange-traded funds are a basket of securities that replicate the underlying index. Similarly, A US Exchange Traded Fund is a portfolio that matches the composition of US Index like NASDAQ, S&P 500, Dow Jones etc., in the same proportion. Hence, the US ETF merely tracks and replicates the performance of the index. These ETFs can be bought and sold on the US stock exchange. The price also fluctuates throughout the day. The value can be determined based on the underlying asset or its stocks.
As investors, you will only hold the portion of the ETF and not the underlying assets of the fund. Moreover, investing in US ETFs gives investors an advantage to diversify into international stocks. Also, it helps to diversify across leading themes in the US stock market.
Investors from India who wish to diversify beyond Indian stocks and financial instruments can invest in the US stock market through US ETF.
These investors are willing and interested in creating a diversified investment portfolio by investing in the international financial market. Significantly, such investors who have time to study the global market and have knowledge of financial instruments can consider investing in US ETFs. Also, they have a better understanding of risk in these markets and a long term investment horizon, seeking exposure in foreign markets.
US ETF becomes an ideal investment option to create a portfolio through different ETFs. This fund can be suitable for first-time investors who are not aware of investing in US markets because it allows investors to invest in a particular index, commodity, sector or theme or a combination of asset classes. Hence, picking a US ETF based on risk tolerance level and return expectation is more effortless than researching individual stocks from the US stock exchange.
The Reserve Bank of India has issued guidelines under the Liberalised Remittance Scheme (LRS) that permit an Indian Resident to invest up to $250,000 per financial year without any restrictions. Thus, with LRS, it has become easy for Indian citizens to invest in foreign countries.
An ETF can be bought and sold only through a demat account, just like shares. Hence, to invest in a US ETF in India, you need to open a trading and demat account.
There are many Indian brokers who have tie-ups with stockbrokers in the US. They act as intermediaries and help execute your trades. You can open a trading account with any such broker by submitting a set of documents. Thus, it is easy to invest in US ETFs through these full-service brokers.
It is important to remember that this facility has certain restrictions. Also, the cost of investing and other currency conversion charges can be high. Hence, you must ensure all these costs before opening an account.
You can also open a trading account directly with a foreign broker who has a presence in India. Some of these brokerage firms are Interactive Brokers, TD Ameritrade, Charles Schwab International Account, etc. that permit trading in US ETFs, US stocks, mutual funds, etc.
Opening a trading and demat account helps you invest in US ETFs by indirectly giving you exposure to foreign equities. Investing in US ETF is easier rather than investing indirectly in US stocks.
There are multiple factors to consider before investing in a US ETF.
The US stock market is an efficient, transparent and well-regulated stock market in the world. Some of the biggest companies are listed on US stock exchanges by market capitalisation and profits. The Securities and Exchange Commission (SEC) is a regulatory agency that oversees the functioning of US stock markets. Also, it ensures strict enforcement of laws and regulations with the highest transparency and integrity. This is a must for investor protection and confidence.
Investing in US ETFs comes with some risk. The primary one is currency risk because the Indian investor must consider rupee appreciation or depreciation. If the rupee falls against the dollar, you get more rupees for each dollar. In simple words, US ETFs are subject to market risk and understanding the foreign market risk is essential.
Investing in US markets involves certain costs. Firstly, you have to convert your investment into US dollars. Also, while setting up the account, you need to remit and transfer the funds to the foreign brokerage for funding the account. There will be currency transfer charges and also account maintenance charges. Therefore, before opening an account for investing in US ETFs, you must evaluate all the charges.
As per the Reserve Bank of India Liberalised Remittance Scheme (LRS), Indian residents can invest a maximum amount of $250,000 in a financial year. Also, this limit includes any amount remitted outside India towards travel, education, or other overseas transactions. Therefore, any amount above this limit requires RBI’s permission.
The social aspects, economic aspects and the political situation of the US have a significant impact on the performance of the ETF. Hence, you must understand and keenly observe the international market before investing.
Investing in US ETFs gives an investor exposure to the US market other than the Indian market. This can help them earn better returns. Also, It helps them diversify their investment portfolio across geographies and boosts the quality of the portfolio.
India and the US have a Double Tax Avoidance Agreement (DTAA) under which the same income cannot be taxed twice. In India, for US ETFs, the period for which any investment is held plays an important role. The income or returns from US ETFs are also categorized under Long Term Capital Gains and Short Term Capital Gains.
Hence, investors must consider all the above factors before investing in US ETFs. Investing in these funds provides investors with global exposure and a chance for better wealth creation.
While constructing a portfolio, it is essential to balance the risk across different geographies. Investing in US stock markets has become very easy with this regulatory framework. However, investors must conduct necessary due diligence before investing.