Two sides of the US investment coin
American share markets are an interesting place. They are one of the largest stock markets in terms of market sitting on top of the world’s largest economy. The American stock market has a combined market of close to $40 trillion if NYSE and NASDAQ are added up. Clearly, the American markets have been an aspirational market, not only for the fund raising companies but also for investors looking to invest their hard earned money in the big Apple.
Stock market trading is always about new opportunities and that is exactly what the US markets offer you. The share market USA is about reach, liquidity, volumes and also about its retail reach, both directly and through mutual funds. There are several benefits of investing in US stocks, but there are several risks. Here is an overall generic look at the pros and cons of investing in the US markets.
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Pros and Cons of investing in the US markets
The biggest advantage of investing in the US markets is that you get to explore new markets, new types of companies and a new asset class altogether. However, there is always a risk when you explore new markets, which is not familiar ground for you. Let us first look at the pros of investing in the US markets.
Pros of investing in the US markets
- Investing in the US markets opens your mind and you portfolio of stocks to new horizons and new opportunities. Some of the US growth stories have been iconic. It was the US market that produced some of the biggest technology names in the last 20 years like Amazon, Apple, Facebook, Netflix. You cannot get such quality of companies at the forefront of various technologies in the US market.
- Diversification is perhaps the biggest advantage of investing in the US markets. With an all India portfolio, you run the risk of Nifty and Sensex cycles. But putting part of your money in the US markets, you are reducing that concentration risk. Some of the US companies in the new age areas like EVs, biotechnology, nanotechnology etc don’t have any correlation to other stocks elsewhere in the world. That is the best recipe for diversifying and reducing your overall portfolio holding risk.
- You money gets a global reach. You are not restricted to investing in India. You would be surprised to know that in the last 15 years, there have been at least 4-5 occasions when US equity as an asset class has been among the top-3 performers. That is the kind of global reach that the US market investing gives you.
- You can even invest passively in the US market indices like the S&P 500, Dow Jones, NASDAQ, which reduces your stock specific risk and pegs you to a dispassionate index.
- One thing you must remember that although you pay taxes in the US, you can get a credit offset for your tax liability in India since India has a DTAA with the US. That reduces your effective tax liability.
- The US markets are relatively less volatile compared to the Indian markets. However, that cannot be said of the last couple of years when the US markets have also been extremely volatile.
Cons of investing in the US markets
Here are some of the downside risks of investing in US equities.
- The first major risk is the currency fluctuation risk. For instance in the last 1 year, the rupee has weakened from Rs74/$ to Rs83/$. Since you can only invest in the US markets in dollars, you have currency risk at both legs of conversion. More the volatility in currencies, greater is the risk you run on currency fluctuations.
- People often wonder where is the economic or geopolitical risk in the US. After all, it is not vulnerable like the Middle East or Eastern Europe. However, we know the kind of risk that 9/11 caused or the kind of instability the global financial crisis caused. There are risks, like the US may classify the rupee as a speculative currency or even put selecting banking embargoes. These are potent risks.
- The US company is sitting on piles of debt. That makes the US economy also vulnerable despite the exorbitant privilege of the dollar.
- Finally, there are global contagion risks like what is happening between US and China or between the US and Russia. Such events can have a long term spill over effect.
US markets are too big to be ignored. It is time to make your American investment move.
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