Where & How Much Should You Invest in Us Stock Markets

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Methodology of investing in US stocks.

You want to buy and sell US stocks, but do you know what are US stocks all about and how to go about buying and selling US stocks. You can also buy and sell the US market index like the Dow, S&P 500 or the NASDAQ. The US stock exchanges is the largest stock exchange in the world, so there is no market that gives you this breadth and depth of US investing opportunity. Literally sky is the limit.

However, US stock market investments can be done in any of the following modes. You can directly open an account with a US broker and trade or you can trade through an Indian broker that facilitates such trades. You can also buy the global funds of mutual funds, which allow you to participate in the US markets either actively or passively. In short, there are several approaches to invest in American stock markets and you can make a choice of what suits you best.

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How much can you invest?

That is largely a function of how much you can afford to invest and how much of risk you are willing to take to invest in US stocks. For instance, Indians normally invest in global portfolios through the route of the Liberalized Remittance Scheme (LRS). This has an outer limit of $250,000 per year or translates into nearly Rs2.04 crore. However, this is the overall outer limit and includes remittances for students abroad, global expenses, maintenance of relatives and global investments. The overall remittance cannot exceed $250,000 in any fiscal year.

That brings us to the next question; how much should you allocate to investing in the US. Ideally start off with a financial plan and allocate about 12-15% of your overall funds to global investments. Don’t exceed that since you don’t have much control or ability to monitor such investments on a regular basis. The range is to oscillate between bull markets and bear markets. But if the allocation exceeds 15% by too much, it is stime to go back to the drawing board and reallocate by reducing your allocations to US stocks. The foreign allocation is for all global stocks, but you can start off with only US stocks due to liquidity.

Direct investments versus indirect investments in the US market

As an investor looking to  invest in the US markets, you have two choices. You can either opt for the direct route or the indirect route. Here is what this implies.

  1. What do you understand by Direct Investment. This implies opening an overseas trading account directly with a domestic broker having a tie-up with stockbrokers in the US. The other options is that you can directly open an overseas trading account with a foreign broker with a presence in India. These includes brokers like Ameritrade and TD Waterhouse. The latter requires a much bigger upfront margin and deposit so first check if you can manage that kind of deposit. You can also buy fractional shares in very high priced companies.
  2. The second method is indirect investing in the US markets. What does this mean? It entails investing abroad through the mutual fund (MF route). For example, you can either directly buy mutual funds or passive funds abroad through a global broker / facilitator. Alternatively, you can invest in fund of funds (FOF) which facilitates sale of units of its parent franchise and gives an indirect opportunity to participate in the US markets. In the US market, you have access to active funds, passive funds, alternate investments, fund of funds (FOFs) etc.

Understanding costs in buying US stocks

Like in any Indian capital markets, there are costs in US stocks too. It starts with a tax collection at source (TCS) on foreign remittances above Rs7 lakhs. However, this is just a presumptive and can be claimed as refund when you file returns in India. Transacting in the US markets entails brokerage on all buy and sell transactions, which includes bank charges and foreign currency conversion fees. There are also transfer fees and one-time account set-up charges levied. Forex fluctuations can also impose a huge cost on you.

Apart from these costs, you have to pay capital gains tax in India, while dividends are taxed at 25% flat in the US. However, since India has a double taxation avoidance agreement (DTAA) with the US, you can claim offsetting credit for the dividend tax paid in the US while filing tax returns in India. Unlike Indian stocks, that qualify for LTCG if held for more than 1 year, foreign stocks qualify for LTCG only if held for more than 2 years.

To sum it up, investing in the US stock market offers global diversification opportunities for Indian retail investors, apart from the job of participating in the global markets.

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