Things to understand before investing in US stocks

---

Introduction

The Pandemic of 2020 has changed the way people invest, save, and spend money. 

People are more focused on investing money and are not afraid to go global. 

Investors can manage and reduce investment risks through diversification. 

Diversification could be Indian or even global; it is not limited to just the Indian market. 

Investors can diversify by investing in the global market, let us understand how an investor can invest in the US stock market.

Can Indians invest in US Stocks from India?

Yes – Indian investors can invest in the US stock market if they are interested in diversifying their portfolio beyond the Indian stocks, bonds, NIFTY 50, and SENSEX. 

Indian Investors can invest in the S&P 500, Dow Jones, NASDAQ, or any US-listed company. 

The Reserve bank of India allows Indian Investors to invest in US stocks and Equity Traded Funds (EFTs) under the liberalisation Remittance Scheme (LRS).

The Reserve Bank of India issues the Liberalisation Remittance Scheme (LRS) to facilitate resident individuals to remit funds outside India. 

Why should Indian investors know how to buy US stocks? 

There are several reasons why Indian investors should be investing in the US share market. But, in the end, it all depends on the understanding and risk-appetite of an investor. 

It is imperative to have a crystal clear understanding of your investment options before you decide to go ahead and invest in them. Hence, some reasons that will help an Indian investor understand why they should invest in the US share market are as follows:

Better Returns as compared to India

The US market has been constantly outperforming the Indian market over the past 10 years. 

From the year 2010 to 2020, the DOW Jones provides 196% returns, while the Sensex provides 150% returns. 

A comparison of the DOW Jones industrial average and Sensex is done here as the DOW index is more similar to Sensex than the S&P 500. 

Both Sensex and DOW Jones index have 30 companies.

In addition to the equity returns, investors may earn out of currency fluctuations also between INR and USD. 

In the past 10 years, Rupee has depreciated by 44% compared to the USD. 

The INR is running at an all-time low, creating a huge performance gap between the Indian and US stocks.

Exposure to other international markets

Investing in the US stock market can be an easy way to invest in other international markets. 

For example, the rapidly growing Chinese economy driven by technological advancement has led to the creation of many technological giants. 

However, these companies instead of going public in China are choosing to list themselves on the US stock market. 

Thus by investing in the US stock market, you could invest in such global companies from different countries. 

Furthermore, there are American Depository receipts of companies from different countries over the globe that enable buying and selling in the US stock market, where multinational brokers or bankers hold the underlying shares.

Regulated Ecosystem

Investing through the US stock market gives another benefit to Indian investors. 

The Ecosystem is well restricted with standardisation of governance and strict rules on financial reporting.

It also promotes transparency, making it easier for investors to make rational decisions by evaluating different investment opportunities.

The investor can invest directly in the MNC rather than its Indian subsidiary.

Many Indian investors invest in international MNCs, assuming that there will be a higher level of governance and transparency. 

However, an investment in the Indian subsidiary of the MNCs becomes expensive for the investor. 

Studies show that an Indian investor has to pay higher when investing in the stocks of Indian subsidiaries than investing directly in the stocks of the MNCs. 

Despite paying higher multiples, the returns can be similar or even lower. 

Thus, an Indian investor can consider investing in the US stock market.         

How are Indians taxed for their investments in the US Stock Market? 

The most crucial aspect of investing is the taxation process of your selected investments. It would be foolish to lose out on a substantial part of your gain in the name of tax, when there are other similar investment choices with tax exemptions. 

Hence, here are two pointers to give you an understanding of how Indian investors are taxed for their investments in the US Stock market.

Tax on Investment Gains

An investor will be taxed in India for the capital gain benefits. Investors will not be Taxed in the US. 

The amount of taxes an investor has to pay in India depends on how long they hold the investment. 

If the investor earns a capital gain by selling the investment held for more than 24 months then the amount of tax would be 20% of such gain. 

If the investor earns a capital gain by selling an investment held for less than 24 months then the tax amount will be computed as per their tax slab rate. 

For example, suppose you sold an investment and earned a capital gain of Rs. 50000. 

You held the investment for 36 months. 

Then, 

The amount of capital gain will be, Rs. 50000 * 20% = 10000. 

(20% tax rate is applied as the investment was held for more than 24 months.

However, if the investment was held for less than 24 months then the tax would have been calculated according to your tax slab rate).

Tax on Dividends

Unlike the investment profits, dividends will be taxed in the US at a lower rate of 25%. 

Fortunately, the US and India have a Double Taxation Avoidance Agreement (DTAA), allowing taxpayers to offset the income tax already paid in the US. 

The 25% tax the investor has already paid in the US is made available as a Foreign Tax Credit and may be used to cover their Indian income tax.

For Example, suppose you earned an income of Rs. 5000 in form of dividends from the US. 

Then,

The amount of tax to be paid in the US will be Rs. 1250 (5000 * 25%) and the amount of tax paid in the US i.e., Rs. 1250 will get offset from the income tax payable in India. 

What are brokerage charges? 

Different entities charge different prices and have different fees and brokerage structures. 

For example, the brokers may charge a fixed fee for each trade or charge a percentage of the total trade or total assets. 

Since the investment process requires an international transfer from Rupee to USD, in addition to any potential broker payments, there may be other payments that investors make to invest in the US. 

These fees can be the cost of international strings or FX conversion fees charged by the investment bank, which may vary depending on the bank the investor is using.

What are the most famous US Investment indices?

Instead of investing in individual stocks, an investor can invest in the US market Indices. The following are some popular US market Indices:

S&P 500

S&P 500 tracks the performance of 500 major US companies with market capitalization. 

By 2019, the S&P 500 has risen by more than 28%, the highest growth since 2013.

The Dow Jones Industrial Average

The Dow Jones industrial average tracks the performance of 30 major US companies trading in US stock markets like New York Stock Exchange (NYSE) and the NASDAQ. 

In 2019, the Dow Jones gained 22% per annum.

NASDAQ Composite Index

The NASDAQ Composite Index tracks more than 2,500 securities listed on the NASDAQ. 

In 2019, the Nasdaq Composite Index exceeded the 9,000 level for the first time.

Fractional shares 

Fractional Shares is the ability to purchase less than one stock. 

That means you can buy high-value stocks like Apple, Tesla, and Amazon for as little as $ 1.

What things to know before investing in US Stocks?

There are always some dos and don’ts in investing. It is impossible to take care of everything. 

However, knowing a few aspects can give headstart to the investors while preventing them from making silly decisions. 

A few things that an Indian investor should keep in mind before investing in US stocks are as follows:

The Liberalised Remittance Scheme 

An investor can invest in the US stock market under the RBI’s Liberalised Remittance Scheme or LRS. The scheme allows every Indian resident to send up to $ 250,000 a year. 

This limit is per person, including the minors, which means that a family of 5 can send up to USD 1.25 million per financial year. 

This allocation covers investments such as US securities, real estate, bank deposits, etc., and all overseas expenses such as foreign travel and student education.

Geographical Diversification

Spatial diversity provides stability to your portfolio. Over time, markets in developed countries tend to be more volatile than in developing countries. 

By investing in the US stock market, you have the opportunity to participate in global growth. 

For example, if you invest in Alibaba, China’s largest retailer, you are now a part of China’s economic growth. 

With ETFs listed in the US market, you can also experience broader economic exposure. 

For example, the EWG ETF listed on the NYSE invested in some of the largest German companies.

The US stock market also allows you to invest in emerging entities, an option to invest in industries not yet available in India. 

There are no manufacturers of large or electric vehicles that you can plant in India. 

However, you can invest in Nvidia or Tesla and create relevant themes as part of your portfolio.

Life Goals

Life goals form an integral part of your investment plan. 

If you intend to study abroad or move overseas, your investment should be able to help you achieve these goals. 

For example, if you plan to save up to $ 100,000 to get your child’s foreign education at a well-known educational institution, your investment portfolio should reflect your expectations. 

This may be achieved by investing in the US market, investment decisions should be made based on the amount of return required and the period you want to stay invested. 

If you want long-term steady returns, then invest in the companies with fewer variations. 

On the other hand, if you want to earn quick returns, invest in aggressive stocks (Disclaimer: Aggressive stocks carry high risks).

Conclusion

Investors can diversify their portfolios by investing in different companies. Companies could be from the Indian stock market or foreign markets. 

We have read about the basics of investing in the American Stock Market. 

Using these basics, you would be able to invest in the US market to diversify the portfolio. 

There might come a situation where the Indian market is not performing well while the US market is expected to outperform. 

An investor may earn returns by investing in the outperforming US market.