When it comes to diversifying your portfolio across geographies, the US stock market is one of the best options. The nation is home to some of the top technological companies as well as other wealth-generating enterprises that present excellent investment prospects. Additionally, it is a desirable potential due to the minimal correlation between the Indian and US equities markets.
For the purpose of the regional diversification, Indian investors can buy foreign stocks in a variety of ways and hold them in their portfolios. Direct shares, mutual funds, and exchange-traded funds are just a few examples of how investing internationally can help you diversify your portfolio. In addition to diversifying your portfolio across asset classes, market size, industries, etc., geographic diversity also helps you manage the risk-adjusted return of your investments.
Investment in the US stock market can be undertaken in the following 5 methods
- IFSC NSE
You can simply buy US equities directly on NSE International Exchange (NSE IFSC), a wholly owned subsidiary of the National Stock Exchange of India. After opening your trading and Demat account with a broker registered them, you can transfer money from your local bank account to the bank account of NSE IFSC registered brokers. Once the funds appear in your broker’s account, you are now ready to trade on the NSE IFSC US Stock platform.
- INX and IFSC In The GIFT City
The India International Exchange (IFSC) Limited (India INX), the international arm of the BSE, also provides access to overseas shares. You can trade in foreign stocks, including shares of key US-listed companies, through its wholly-owned subsidiary India INX Global Access. Around 80% of the stocks that India INX intends to offer will come from the US, Canada, UK, Europe, Australia, and Japan.
- International Mutual Fund
Through international mutual fund schemes, there are multiple prospects for overseas investments for Indian investors. Although some of these mutual fund schemes track indices for countries in Asia or Latin America, most schemes track the US market. SEBI has currently instructed the Indian mutual fund houses to take their time collecting deposits for overseas funds as the upper limit has been achieved. To invest overseas, one may think about using an ETF or Fund of Funds.
- Exchange Traded Funds
Exchange-traded funds (ETF) units are traded on the stock exchange during trading hours. As a result, one can buy and sell ETF units while the exchanges are open in the same way that one would buy and sell stocks. Anyone with a Demat account at any brokerage house is eligible to trade ETFs. Several ETFs offer access to Nasdaq and other important international indices.
- Indian Apps
Indian investors now have access to the US stock market thanks to a partnership between Vested Finance and online investment platform Kuvera.in. Numerous platforms have evolved that enable direct investment in the US stock market in response to the growing interest of Indian retail investors in international stock markets, particularly US markets. Recently, the global investing services of ICICI Securities, Axis Securities, Matertrust, Winvesta, and Vested Finance were also introduced. Kuvera’s cooperation with Vested Finance will give investors the possibility to diversify their portfolios outside of the Indian stock market and invest directly in U.S. stocks like Netflix, Facebook, Apple, Tesla, and the like.
A 10 to 20% allocation to international markets will increase your portfolio’s resilience to domestic market fluctuations. International markets definitely have a lot to offer. At least right now, US exposure is a reliable indicator of global exposure. Additionally, US markets have a lengthy history, substantial liquidity, good corporate governance, and are the home of world-class businesses in a variety of industries.
Through an entirely legal process, the investor can invest directly in the parent stock through international investing as opposed to indirectly through the company’s India entity. This is done by adhering to the RBI’s Liberalized Remittance Scheme (LRS) rules, which set the maximum amount and intended uses of remittance. A resident of India may transmit up to $250,000 overseas each year without obtaining RBI consent under the LRS.
Customers interested in investing in US markets will be able to take advantage of the following features thanks to the partnership:
- Unlimited commission-free trading on US stock exchanges.
- Investments as low as $1 can be made in expensive stocks like those of Berkshire Hathaway, Google, or Amazon thanks to fractional trading, which allows for purchases of less than one share.
- Partnerships with banks to provide online and pick-up remittance services have simplified the transfer procedure.
- Tax returns in accordance with Indian law.
Things To Keep In Mind
Before Investing US stock markets there are a few things which you should keep in mind. You should think about a few factors before investing in the US stock market, as this article will highlight. What You Should Know Before Buying US Stocks.
The Liberalized Remittance Scheme
Under the LRS, or Liberalized Remittance Scheme, of the RBI, you are permitted to invest in the US stock market. Every Indian resident who participates in the programme may send up to $250,000 annually outside. This cap is per person, including minors, thus a family of four can send up to USD $1 million in one fiscal year. This quota covers all investments, such as US securities, real estate, bank accounts, etc., as well as any out-of-country costs, such as travel and higher education.
Your portfolio’s geographic diversification delivers stability. Markets in mature nations are typically less volatile in the long run than those in emerging nations. You can take part in the tale of global growth by making investments in the US stock market. For instance, if you invest in Alibaba, the largest retailer in China, you can now benefit from the country’s economic expansion. You can also gain exposure to larger economies through ETFs listed on the US market. For instance, the NYSE-listed EWG ETF made investments in some of the biggest German corporations.
Additionally, you can invest in new themes on the US stock market, which is a possibility not now available in India. You cannot invest in large semiconductor or electric vehicle makers in India. However, you might make an investment in Nvidia or Tesla and include those topics in your portfolio.
Foreign Exchange’s Returns
The variation in the exchange rate should be taken into account while investing in the US market. The rupee has lost value versus the US dollar on average by 3 to 5 percent in recent years. When you participate in US markets, you do so at the risk of investing in the US Dollar. Your portfolio’s worth increases when the value of the US dollar rises, and vice versa. Your Indian bank can additionally charge you an FX conversion fee or spread when you send money to invest in the US. Depending on the bank, this can range from 0.5% to 2% of the amount transferred.
To make your efforts worthwhile, it is crucial to take into account the tax implications of your international assets. A double tax avoidance agreement (DTAA) between the US and India forbids taxing the same income more than once. Your stock market investments in the US are subject to two taxes.
- Dividend Tax: US stock dividends are subject to a flat 30% tax for international investors. However, as a result of the tax agreement between the US and India, residents of India pay a 25% tax rate (deducted before distribution). However, because of the double tax avoidance agreement between the US and India, the tax paid in the US may be claimed as a foreign tax credit in your domestic filing.
- Capital Gains Tax: In the United States, there is no capital gains tax on your investments. However, India requires you to pay tax on your overseas capital gains. This can be divided into two categories:
- Long Term Capital Gains Tax : LTCG means if you keep the equities for more than 24 months before realising capital gains, you will be subject to indexation advantages and a 20% tax rate in addition to any relevant fees and other surcharges.
- Short Term Capital Gains Tax : Profits from investments held for less than 24 months are added to your ordinary taxable income, and standard income-tax regulations are applicable. This is known as a short-term capital gain (STCG). You must also take into account the recently implemented Tax Credited at Source, or TCS. According to the new regulations, a 5% TCS will be applied to all international transfers over INR 7L in a fiscal year. This up-front tax is not an additional charge and can be deducted from your taxes each year. The TCS is covered in more detail here.
Your investing plan should include your life goals. Your investments should be able to assist you in achieving your goals, including moving abroad to study or work. For instance, your investment portfolio should match your goals if you intend to save up to $50,000 for your child’s study abroad. The diversification objectives, where you might desire exposure to commodities or gold ETFs, for instance, may require this to be separate.
You need a US brokerage account if you want to invest directly in US stocks. Unlike in the past, opening a brokerage account is now straightforward thanks to digital platforms like Kuvera. You won’t be charged any account opening fees or yearly maintenance fees by Kuvera.
Many platforms offer large joining costs and annual maintenance fees, charging as much as $6.99 per trade, which can have a negative impact on the performance of your portfolio. Before registering with a platform, one must be informed of such expenses.
The Concept Of Fractional Ownership Of Shares
The smallest component of a firm in which you can invest on the Indian stock market is 1 share. With the US stock market, however, this is not the case. Many major US corporations have share prices in the hundreds of thousands of dollars. Retail investors might not be able to purchase US stocks as a result. Therefore, the Securities and Exchange Commission (SEC), the regulator of the US stock market, introduced the concept of fractional ownership of shares to ensure that ordinary investors can invest in US corporations. Because of the fractional share concept, retail investors can now invest in a firm by buying fewer than one share. Let’s imagine, for illustration, that you want to buy Apple Inc. shares. One Apple Inc. share currently costs around $150, which is a hefty sum. What do you do then? Because of fractional ownership, you can opt to pay merely $75 to buy a portion, say 50%, of a share of Apple Inc. You’ll end up owning a half-share of the corporation if you accomplish this.
Investing in US shares can help you diversify your portfolio. Especially in reducing country-related risks, however, it is important to note that investing in US Stock involves a lot of complications. One should first understand important aspects associated with an investment in US stocks such as taxation, fractional ownership of stocks, brokerage fee, US bank account etc., before investing in US stocks.
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