Prime Minister Narendra Modi and American President Donald Trump call each other friends. If America and India are buddies, can US stocks and Indian stocks be far behind? All country markets don’t rise or fall at the same time. Hence, it is a prudent decision to invest across countries from a risk management perspective. Today, technology rules and allows Indian investors sitting in the comfort of their homes in this country can today invest in US stocks. All of us love our country, but investing in companies of other countries is a smart geographical risk mitigation strategy. In this article, we will explain to you how desi investors can invest and gain from US stock investments. Read on to know more.
One of the fundamentals of investing is diversification, used as a hedging tactic against any unforeseen scenarios. Historically, diversification meant buying properties, investing in gold and creating fixed deposits. Over the past decade, with the increasing number of demat accounts, Indian investors are moving towards creating a balanced portfolio, parking money in direct equities and mutual funds (MFs).
With a considerable amount of Indian populace settled abroad, remittances in and out of the country have also increased. However, individual Indians have sent over $35billion overseas (via RBI’s LRS) since 2015 where most of this money was ‘spent’ rather than being invested. This behavior can be directly attributed to the fact that Indian investors are constrained to local markets as investing in global markets involves expenses and cumbersome processes, enabling only Ultra-HNIs and institutions to benefit from cross border investing.
Today, there are various ways in which Indian investors can invest in global stocks. You do not need to go to a foreign country to invest in their stocks. You do not need to be a visa or residence permit of the foreign country to be able to invest. The average Indian retail investor can invest in global stocks quite easily.
However, it has to be mentioned that foreign investments can be as volatile as Indian stocks. Plus, there is additional risk of foreign exchange movement. International stocks exposure should be more than 15-20% of your portfolio if you are an aggressive investor who uses the MF route.
Those who invest in global stocks directly or through mutual fund/ETF route are advised not to do trading. Have a minimum 5-year investment horizon, if you take exposure to global stocks, while regular monitoring is not discouraged.
Direct global stock investments
RBI’s Liberalized Remittance Scheme (LRS) guidelines allow an Indian investor to invest in global assets like stocks. Instituted by the RBI, the LRS is a set of policies that governs the maximum amount and purposes of remittance. Under the LRS, an Indian resident can annually send up to $250,000 abroad without seeking approval from the RBI. The LRS has made it easier for Indian residents to study abroad, travel, and make investments in other countries.
There are various ways, in which you can directly invest in global stocks. The first is through an Indian brokerage firm, which has a tie-up with a global firm. In most of the cases, the only country you can invest is the US.
For instance, HDFC Securities has partnered with Stockal to introduce global investing for customers. Now, Indian customers can buy/sell shares of companies like Apple, Google, JP Morgan, Tesla and more; or invest in thematic ETFs from Robotics to Pharma to Energy; or just save money safely in the US for future education needs, etc., all in just a few clicks.
HDFC Securities’ global investing offering allows customers, who can now make and manage investments in the US financial markets. This will not only be an opportunity to diversify investments internationally, but also to invest in specific global growth stories or simply invest in popular US companies listed on Nasdaq. Multiple Indian bank relationships have been created on the platform to ease the process of LRS and reduce forex load on investors looking to invest outside of India.
Indians have already lost out on the last decade where they could have made a small fortune for themselves investing in FANG stocks (Facebook, Apple, Netflix, and Google). They could also have ‘counter-attacked’ periods of domestic market gloom by making Gold and US Treasury bonds a part of their investment strategies. Being an extremely well-regulated market with complete transparency and stringent disclosure protocols, US markets can easily find a sweet spot in the Indian portfolio content.
Indian retail investors have open a US-brokerage account online, upload PAN card and Address proof (Aadhar or Utility Bills), subscribe to an annual plan of choice and fund the account by remitting money through LRS from Indian Bank Account. Then, they can invest.
Carefully curated and automatically personalized, Stockal products are designed to help investors and advisors keep life simple and costs low as they stay on top of their investments. As its first leg to its global vision Stockal has created a platform to help Indian and GCC users to invest and trade in US equities and fractional investing.
A lot of Indian wealth is completely locally concentrated. In comparison, the US investors have 15 per cent of their portfolio invested in international equities.
There are also fintech platforms like Vested who also allow you to invest in US stocks. Many full-service Indian brokers have a tie-up with the foreign brokers, thus making it simple to open your overseas trading account with their partner (foreign) brokers.
Vested offers a commission-free platform for investors in India to invest in the US markets. It is the first and only player to offer commission-free direct access to US stocks and ETFs to investors in India. Vested has partnered with a broker called Drive wealth in the US.
Vested also helps simplify the investing process by offering curated portfolios called Vests. These portfolios are based on different themes and strategies. Along with offering a simple onboarding process, the fund transfer process under the RBI’s Liberalized Remittance Scheme (LRS) has also been improved via partnerships with banks.
This apart, few international brokerage firms like Charles Schwab permit Indian citizens to set up an account and trade in US stocks, mutual funds, etc. If you look at all the large brokers in the US, the likes of Charles Schwab or Etrade, they all now offer zero commission trades. Their revenue is based on interest income and other value-add services.
US investing costs, taxes
Some of direct US stock platforms, allow you to invest in either full or fractional shares. When your investment is in full shares, the broker partner will route the orders to market centers on an Agency basis. When the investment is fractional shares, the broker partner will satisfy the order from its own account, on a Principal basis, at the National Best Bid or Offer (NBBO). NBBO means that the broker can’t add margin to the price.
Fractional investing helps lower the barrier to getting started. Now, people can invest as little as $10 and build a large portfolio over time. Due to the advent of technology, fractional investing has actually become quite common in the US.
The two key costs that need to be considered are platform costs and fx (forex) costs. For someone using a stock platform, platform costs apply if they pick any of paid features. If not then they can get started without any costs.
The fx cost is additional when compared to investing in Indian stocks. However, one point to note is that since the investment is in dollars, the INR depreciation also adds the investor’s return. The INR has depreciated by an average of four per cent vs. the USD in the last 10 years. Therefore, to a certain extent, investing in USD can help offset the fx costs.
Indians investing in US stocks could face two types of taxation events
Taxes on investment gains: For this they will be taxed in India only, they will not be taxed in the US. The amount of taxes that have to be paid in India depends on how long the investment is held. 24 months is the long-term capital gain threshold and the long-term tax rate is 20 per cent with indexation benefit. Below 24 months is short-term capital gain and is taxed according to the investor’s income tax slab.
Taxes on dividends: Unlike investment gain, dividends are withheld in the US at a flat rate of 25 per cent. However, US and India have a Double Taxation Avoidance Agreement (DTAA), which allows taxpayers to offset income tax already paid in the US. The 25 per cent tax paid in the US is made available as Foreign Tax Credit and can be used to offset income tax payable in India. The dividend is then taxed as regular income in India.
The writer is a journalist with 14 years of experience