The Implications of Investing in US Stock Markets

Do you want to trade in the US markets sitting right here in India? Here is how to go about it. Today you have the luxury of buying US stocks in India and you can do it in multiple ways. Once you identify the US stocks to buy like Amazon, Netflix, Nvidia, Intel etc, you can then decide on the next steps. Most brokers have tie-ups with the global brokers for enabling trading in the US stocks. Hence, you not only trade US stocks using the same regular apps for stock trading but also get the added benefit of top stock research and you can have this benefit before trading in the US stocks. 

One basic rule is that just as you cannot time the Indian markets, you also cannot time the US markets. That is a universal truth. Hence, regular investing helps you take advantage of the market fluctuations. When you invest an amount consistently like a systematic investment, it gives you the added advantage of discipline, growth and dollar cost averaging. While the share market in India can give you returns, you get the added benefit of diversification by investing in the US markets. Don’t go by Indian share market tips or US share market tips. They are dangerous everywhere. Use solid research and you own judgement irrespective of whether you want to invest in the US or in India.

Why investing in the US markets is a good idea?
Many Indian investors prefer the US markets when it comes to exploring global market opportunities or when it comes to diversification of their risk. After all, the US markets constitute one of the most developed, liquid, flexible and efficient financial markets in the world. US is a largely institutionalized market so the benefit of expert inputs and in depth research naturally makes the markets more efficient and effective for investing.

Today, it is possible to invest in fractional shares in the US. Let me explain. For example, the stock of Microsoft currently quotes at around $290 per share. If you consider the current exchange rate of 79.50/$, the cost of one share works out to approximately Rs23,000. That would be intimidating to most investors. One answer is fractional shares, which is now possible through Indian brokers. You can buy fractional shares of Microsoft, Zoom, Amazon, Netflix and Google or any other US company of your choice.

Three ways to get exposure to the US stocks

Getting exposure to the US markets is not just about buying shares. That is just one of the methods. There are other ways too. Let us look at 3 interesting ways to participate in the US markets, either directly or indirectly.

a) You can invest in the US markets through exchange traded funds or ETFs. Here is how it would work. Why do we suggest ETFs. Investing directly in equities requires a degree of expertise and could result in losses for investors if not done properly. One way is to opt for a low cost exchange traded fund (ETF). A single ETF can be benchmarked to an index like the Dow Jones or the S&P 500 so by investing a small amount, you get exposure to a large number of stocks. You can also take sectoral ETFs like IT ETFs or digital ETFs or healthcare ETFs for sectoral plays. ETFs are quite popular among Indian investors and you can buy these through your normal brokerage accounts or even through your mutual funds that hawk such ETFs to Indian investors.

b) We did discuss direct stock investing in a good deal of detail, but that is the second option you always have. Buying US stocks gives you the benefit of diversifying the portfolio across nations bringing much-needed stability to the stock portfolio over the long term. You can open an overseas trading account with any domestic brokerage that collaborates with the fintech players to provide a global investing platform.  Most of these broking accounts are also insured by the FDIC. Here the risk is that you don’t get any stocks in your demat account as the demat account does not permit holding of demat shares. It is held separately.

c) The third way is to invest in US markets through the mutual funds route. This is the easiest approach. Many of the Indian mutual funds with global partners offer the ETFs of their parent companies to the Indian investors. They act as feeder funds in this case, but the redemption takes longer than the normal domestic funds. However, it is possible to invest in a spread of global markets through such funds and take positions in indices or in specified portfolios of the global funds. The choice is yours. Most of the funds in India offer the facility of international funds, which is normally a fund of funds or FOF. However, they do entail expenses at two levels so the cost is higher.

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Four key aspects to understand in US market investing

If you are all set to invest in the US markets, through any of these routes, just hold  your breath. There are a few more considerations for you to tackle. Here are four such factors you must keep in mind before investing in the US stock markets, either directly or indirectly.

• Remember, there is an issue of double taxation that you need to be familiar with. Any dividend from the US companies will be taxed at a flat rate of 25%. The definition will change and long term will now be 24 months and not 12 months. Also, long term gains are not taxed in the US but taxed at 20% in India. Short term gains are taxed at your tax slab. The concessional rate of taxation on Indian equities is not available to you. However, if the US pays you after deducting TDS, you can claim that in India as an adjustment since India has a double taxation avoidance agreement (DTAA) with the US and over 80 other countries.

• When you invest in the US markets, there is exchange rate risk to worry about. There are risk both ways and the currency risk is the cost of the investors. Even in the case of ETFs or mutual funds or fund of funds, you get NAV only after factoring currency risk and hedging costs.

• Thirdly, you need to understand the Liberalized Remittance Scheme (LRS). As an Indian resident, you can make purchases of stocks as long as you are withing the maximum limit $250,000 per year. Under the new income tax rules, any remittance above Rs7 lakhs per year, incurs 5% tax collection at source (TCS). Of course, this is presumptive so it can be set off against your tax liability.

• Finally, it is important that you choose the right platform. The platform that you opt for should be able to offer you a secure brokerage account with simple digital processes. It should offer you the choice of stocks, mutual funds and ETFs across sectors in the US markets. 

The above are just about illustrative. You can look at some more pointers too. For instance, check the cost of setting up an account, banking tie-ups that the investment platform has, its level of customer service, value added offerings etc. At the end of the day, investing anywhere in the world is a fight between price and value. It is up to your judgement.