Are you an investor looking to diversify beyond the Indian stock market? Have you been eyeing those innovative and omnipresent tech companies and wish to be a part of their growth story? Having extensively covered how robo advisors can help in financial planning and analysis in our previous articles, and how one can invest in the stock market through discount brokers in India, we shall now look at how Indians can invest in the US stock market.
Table of Contents
- Why Should I Invest in US Stocks?
- How can I invest in US stocks from India?
- Key Constraints While Investing in US Stock Market
Why Should I Invest in US Stocks?
As per Reserve Bank of India (RBI) guidelines under the Liberalised Remittance Scheme (LRS), an Indian resident can invest up to $250,000 (₹1.8cr) per annum without permissions.
However, trading in US stocks is not as simple as opening a DEMAT account.
There are certain things one needs to bear in mind before investing in foreign stocks such as intimating the RBI of the transactions, fluctuating exchange rates, or varying taxation rules. But first things first.
Why invest in the US stock market?
- The US stock market has consistently outperformed the Indian stock market over the last 10 years in dollar terms
- Indices are in general less volatile
- Many US stocks are truly global corporations, thereby giving you a more diversified and risk adjusted exposure
- And lastly who doesn’t want to bet on innovative tech companies which seem to surround us, be it an Amazon, an Apple, or Netflix?
As the centre of global innovation and new age sectors, it can be a fascinating investment journey.
How can I invest in US stocks from India?
There are two easy ways to invest in US stock market from India - either direct or indirect.
Opening an Overseas Trading Account with a Domestic Broker
You can straight up open an overseas trading account with a domestic brokerage that has tie-ups with US brokers such as ICICI Direct , Axis Securities, HDFC Securities etc. Furthermore, as per market grapevine, discount brokers such as Zerodha also appear to be flirting with the idea.
For instance, HDFC Securities last year announced a tie-up with Stockal, a New-York headquartered global investment platform whereas ICICI Securities and Axis Securities have a tie-up with Saxobank, the Danish investment bank governed by EU regulations.
These foreign brokers act as intermediaries and execute the trades on your behalf in the foreign market.
Open an Overseas Trading Account with Foreign Brokers
One can also open a trading account directly with international brokers who also have presence in India such as Charles Schwab, Interactive Brokers and TD Ameritrade.
Similarly, US Securities and Exchange Commission (SEC) registered investment advisors such as Vested, offers stocks, exchange-traded funds (ETFs) and custom-made portfolios (called “vests) to Indian investors.
Vested has a tie-up with a SEC-registered broker Drivewealth and offers zero commission, fee-oriented ($3 upfront + 0.0417% monthly for their custom portfolios from users as per Vested’s pricing page) investing to its users, with options to own “fractional shares” i.e. You can also trade “parts” of a share instead of buying the “whole” share. Vested has no minimum balance requirement.
Indias leading discount brokerage firm Zerodha is also planning to offer US stocks on its trading platform. The timeline for the services is yet to be determined.
Investing in Mutual Funds
One can also invest in foreign equities by investing in mutual funds that invest in stocks listed on exchanges outside India.
This is perhaps the easiest approach to invest in foreign stocks as it does not require opening an overseas trading account or even maintaining a minimum deposit, often as hefty as $10,000.
Some popular mutual funds that trade in global equities are Franklin India Feeder Franklin US Opportunities Direct Fund-Growth, ICICI Prudential US Bluechip Equity Direct Plan-Growth, DSP US Flexible Equity Direct Plan-Growth, Kotak Global Emerging Market Fund Direct-Growth
However, this approach can be more costly. You must bear in mind that the expense ratio (fees charged to manage the fund) for these funds tend to be higher since the fee is for both the general management of the fund plus an additional expense charged by underlying international schemes they invest in.
For instance, the Franklin Templeton feeder fund in India, which invests in the Franklin Templeton US Opportunity fund charges 1.54% expense fee, which is in addition to the 1.82% fee charged by the underlying US Opportunity fund.
Investing in ETFs
Investors can also buy ETFs of international indices such as Nippon India US Equity Opportunities Fund, Motilal Oswal Nasdaq 100 ETF to get exposure to a basket of international stocks. This can be done via the same brokerage houses.
Key Constraints While Investing in US Stock Market
Foreign Exchange Risk
Now while investing in international stocks may seem like a winning idea, it comes with its own hassles.
The most obvious risk is that of foreign exchange. Foreign companies trade and pay dividends in the currency of their home country. Even if you make a profit, exchange rate risks such as a falling rupee can reduce your Indian currency conversion and ultimate gains. Another currency-related risk is that foreign currency controls that may limit the amount of money you can take out of the country.
Besides this, account opening charges and brokerage charges for international trading are quite high. Brokerage charges for international trading in the US are as high as 0.75% or 9% per trade.
Taxes on Investment Gains
Capital gains made through foreign stocks and funds are taxed in India somewhat similar to domestic debt mutual funds - dependent on how long you hold the investment.
Taxes will not be withheld in the US.
The holding period for Long-Term Capital Gain (LTCG) is two years for foreign stocks and three years for foreign mutual funds, with tax amounting to 10% without indexation or 20% with indexation (whichever is lower).
If you sell a stock within a three-year holding period, capital gains made are considered as short-term Short-Term Capital Gains (STCG) and are taxed according to your income tax slab.
Taxes on Dividends
Unlike investment gains that are taxed in India, dividends will be taxed in the US at a flat rate of 25%.
Fortunately, the US and India have a Double Taxation Avoidance Agreement (DTAA), which allows taxpayers to offset income tax already paid in the US. The 25% tax you already paid in the US is made available as Foreign Tax Credit and can be used to offset your income tax payable in India.
With that behind us, we are now hopefully ready to test international waters in search of some gains during these tumultuous times.
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