Pros and Cons of Investing in Us Stock Market

Two sides of the US investment coin

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.

Pros and Cons of investing in the US markets

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

• 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.
• 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.

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.