Thursday, August 13, 2020

How to Invest in the US Stock Market from India?

How to Invest in the US Stock Market from India

Few brokers which work in India and provide global stocks investing options are as follow:

https://www.hdfcsec.com/globalinvesting

https://www.interactivebrokers.com

The United States of America is the world’s largest economy. As a result of that, it also contains the largest stock market in the world. Not only is the largest stock market in the world, it’s also one of the best performing. On top of that, it also gives investors an opportunity to invest in companies from other countries which might not be available in their own country. With all these shining benefits, it only makes sense for Indian investors to invest their money in the US Stock Market. However, investing money in a foreign stock market isn’t as simple as investing in your own country. In this post we will answer the question which is on the lips of every internationally focused savvy Indian investor: “how to invest in the US stock market from India”. It’s a wonderful idea to invest in the US Stock market and diversify your portfolio. We will discuss the basics of doing that and we will also cover some key terms that are associated with investing in the US stock market. Let’s get started.

 

How to Invest in the US Stock Market from India: Things You Need to Know

Why should you invest in the US market?

Superior returns compared to India

The US market has seriously outperformed the Indian market on a consistent basis over the last decade. It also contains some of the world’s best performing stocks for you to invest in. During this time period, the DOW returned 196%, while the SENSEX returned 150%.

Aside from the superior returns on equity, savvy investors should also consider the impact of INR-USD rate fluctuations. In the past 10 years, the Rupee has depreciated 44% compared to the USD. This has a significant negative impact towards returns of Indian stocks widening the performance gap.

Exposure to other markets

Investing in the US can be an easy way to invest in other international markets. A great example of that is the ease with which you can invest in the Chinese economy via your investment in the US market. The fast growing Chinese economy – driven by a growing middle class and rapid technology adoption – has led to the creation of some of the world’s leading technology companies. However, instead of going public in China, more and more of these Chinese technology companies are choosing to list in the US.

Indian investors can also enjoy the incredibly well regulated US Stock Market ecosystem. The ecosystem is efficiently regulated and has strict controls on financial reporting, transparency, and standardized governance practices. It makes it very easy for investors to seek and analyse multiple different opportunities.

You can directly invest in MNCs rather than the local indian subsidiary

Many investors living in India invest in international MNCs because they assume there is a higher level of governance, technological proficiency and transparency in MNCs. However, investing in Indian subsidiaries often ends up being significantly more expensive. We studied 16 MNCs that are traded in reputable US exchanges and that have Indian subsidiaries that are also publicly traded in India.

Low multiples payments

When compared to American investors, Indian investors pay around three times higher multiples (P/E trailing twelve months) when they invest in Indian subsidiaries instead of investing straightaway in the US based parent company. And despite paying significantly higher multiples, the average returns can be similar. The average 2019 returns of the US parent companies was ~14%, while the average returns of the Indian subsidiaries was ~17%.

The above mentioned reasons cause a lot of savvy Indian investors to invest their hard earned cash directly in the US stock market. If you are looking to do that, you might be asking “How to Invest in the US Stock Market from India?” Let’s take a look at the answer.

What are the different ways I can invest in the US stock market?

Brokerage Approach

The brokerage approach typically involves overall lower costs for the investor, but requires you to wire funds to the US. As an Indian resident, you are allowed to do this per the Liberalised Remittance Scheme (LRS), where you are allowed to invest up to US $250,000 per year per person.

Some brokers which works in India and provide global stocks investing options are as follow:

Investing in International Mutual Funds

You also have the option to invest in International Mutual Funds with a US focus that are available in India. Contrary to the above mentioned brokerage method, there is no investment limit for Indian residents in this method. The main reason behind that is that all investments are made using Indian Rupees and not US Dollars. This approach might end up being more expensive in the end though. The reason behind that is the higher expense ratio (fund management fees) as it includes both the general management of the fund plus an additional expense charged by underlying international schemes they invest in. For example, the Franklin Templeton feeder fund in India invests in the Franklin Templeton US Opportunity fund. The Feeder fund charges 1.54% expense fee, which is on top of the 1.82% fee charged by the underlying US Opportunity fund (see the fine print at the bottom of the fund prospectus for this information).

How will I be taxed for these investments?

When you invest in the US stock market, there are two types of taxation events:

Taxes on investment gains

You will be taxed in India for this gain. Taxes will not be withheld in the US. The amount of taxes you have to pay in India depends on how long you hold the investment. The threshold for long-term capital gain is 24 months, with the rate of 20% with indexation benefit. If you sell a stock in less than 24 months, capital gains are considered short-term and are taxed according to your income tax slab.

Taxes on dividends

Unlike investment gains, dividends will be taxed in the US at a flat rate of 25%. Luckily, both America and India have signed a Double Taxation Avoidance Agreement (DTAA). This allows the taxpayers to offset the income tax that they have already paid to the US Government.

How do I fund my account to invest in the US stock market?

Since investments in US equities must be made in USD, you must wire (remit) USD to your brokerage in the US before you can start investing.

What are the brokerage charges?

Different entities charge different rates and have different structures. For example, brokers might charge a fixed fee per trade or charge a percentage of total trade or total asset. Since the investing process requires international transfers from Indian Rupees to US Dollars, in addition to any potential brokerage fees, there might be other fees that investors incur in order to invest in the US. These fees could be international wire fees or FX conversion fees that the investor’s bank charges, which may vary depending on the bank that the investor uses.

How much can I invest?

In accordance with the LRS, an individual can remit a maximum of US $250,000 USD per year for investments.

Investing in the US Stock Market from India: Key Terms to Know

Investment Indices

Instead of investing in individual stocks, when investing in the US, investors can easily invest in a broad diversified basket of stocks through indices. Several popular US indices are:

  • S&P 500: It does the job of tracking the performance of the largest 500 American firms based on their market capitalization. In the year 2019, the S&P 500 surged more than 28%, which is the highest increase since 2013.
  • Dow Jones Industrial Average: tracks the performance of 30 large US companies trading on the New York Stock Exchange (NYSE) and the NASDAQ. The Dow Jones performed very well in 2019, gaining 2019 through the year.
  • Nasdaq Composite Index: This does the job of tracking more than 2,500 securities that are listed on the NEw York based NASDAQ. The NASDAQ also had a great 2019, with the Nasdaq Composite Index breaking the 9,000 level for the first time in history.

Sectors

The US is the largest economy in the world and as a result houses the world’s largest stock market. The American economy has been classified into 11 major sectors. Some of those sectors are communication services, energy, real estate and utilities. 2019 was so great for the American economy that all 11 sectors posted net positive returns.

So hopefully, the post has given you some answer to your question of “how to invest in the US Stock Market from India”. While the market is very lucrative and the returns tend to be great, always do your due diligence, thorough research and ask existing international investors for advice in the field before sending your hard earned money to the US Stock Market. Always remember to invest your hard earned money very wisely.

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