Things to Keep In Mind if You Want to Invest in Us Stock Markets

Prepare yourself to invest in the US markets

If you intend to invest in the US markets, you obviously need to prepare yourself mentally and also financially for the allocation. The US share market offers a world of opportunity for Indian investors, but there is a process that goes behind it. It is essentially to understand the process and the pre-requisites. Today, thanks to the Liberalized Remittance System (LRS) plan of the RBI, it is possible to invest up to $250,000 in foreign markets without any questions asked. You can not only invest directly in US stocks but also in the US stock market index like the Dow, S&P 500 and the NASDAQ.

The American stock market is undoubtedly the biggest and the most liquid market in the world and gives you access to iconic names like Amazon, IBM, Exxon, Microsoft, Google etc on a single platform. You can trade US stocks sitting right here in India from a short to medium term perspective to ride on smart global trends. At the same time, you can also buy US stocks for the long term since some of the US stocks have been sterling wealth creators in the long run.

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How to prepare yourself before investing in US stocks?

1. The US market is not only one of the most tightly regulated markets in the world, but there is a premium placed on compliance and abiding by the rule book. You need to be prepared for that even before you start investing in the US markets. There are disclosure requirements to local regulators also. Unlike in many markets, the US markets are extremely touchy about maintaining the market process and the market integrity. It is considered to be one of the safest markets in the world and to keep it safest, the onus is on all the players to play by the book. Penalties for non-adherence of rules and regulations can be quite steep in the US; on individual and also on institutions.
2. Remember that when you invest in the US markets, there are currency risk implications and there are also tax implications. Let us focus on the currency risk implications first. You would be surprised to know that if you are invested in US stocks, then a weak rupee would actually work in your favour since you would get more rupees for each dollar when you convert these dollars back into Indian rupees. However, on the other hand, a stronger dollar can work against you and you need to be prepared for that. On the tax front, capital gains are not taxed in the US, but will be taxed in India as non-equity assets. However, any dividends paid out by the US companies are taxed at a flat rate of 25% in the US. However, since India and the US have signed a Double Taxation Avoidance Agreement, the dividend tax paid in the US is available as offset credit in India.
3. There are two things you must know about the methodology of investing in the US. Currently, such investments happen under the RBI’s’ Liberalised Remittance Scheme (LRS), which permits remittance of an outer limit of $250,000 per year. This is the blanket limit and includes your international remittance towards education, travel, purchases and investments. Secondly, unlike in India, wherein the minimum lot to buy is 1 share, the US Securities and Exchange Commission (SEC) has also allowed the purchase and sale of fractional shares in the US.
4. Investors need to understand the costs involved. First and foremost, when funds are remitted abroad under the LRS, there is a presumptive tax of 5% charged as Tax Collected at Source (TCS) on remittances above Rs7 lakhs per annum. This is refundable at the time of filing returns. In addition, there is account setting up cost, currency cost, bank charges, brokerage charges and an annual maintenance charge levied by such brokers. When you calculate the break-even cost, you need to factor all these costs and take them into account.
5. Lastly, you must do your research on the US markets. The US markets can also be extremely volatile. For instance, stocks like Amazon, Google, Microsoft, Facebook and Apple have lost over $4 trillion in market cap in the last 1 year. That is more than the market cap of Indian markets, just for the sake of perspective. It is not just about investing in these companies but you must also take time off to track news and 10K filings made by these companies. There is a lot of homework to be done.