Investing in the US stock market opens up opportunities for Indian investors to get involved with global companies from technology firms to well-known brands. Before getting started there is one choice to make: should you buy individual US stocks or invest via exchange-traded funds (ETFs)?
Both choices let you participate in the US market. They have differences when it comes to spreading out your investments, the level of risk the costs involved and how much research you need to do. Knowing these differences can help you pick the approach that best matches your investment goals and how risk you are willing to take.
What are US stocks and ETFs?
US stocks are a way to own part of a company. If you buy shares of Apple or Microsoft your profits depend partly on how those companies do and how their stock prices move.
US ETFs are investment funds that trade on stock exchanges. An ETF might own shares of companies and follow an index, a sector or a particular strategy. For example an ETF that follows the S&P 500 gives you a way to own a group of US companies with just one investment.
Not every ETF offers wide variety. Some focus on one area while others follow a group of companies. Look at the ETF’s investments. What it aims to do before making a decision.
How do ETFs differ from stocks?
Factor
Individual US stocks
US ETFs
Ownership
Exposure to one company
Exposure to the fund’s underlying holdings
Diversification
You need to invest in multiple companies
You can get exposure to many companies with one investment
Risk
More affected by what happens to one company
Can lower the impact of a single company’s problems but market and sector risks are still there
Research
You need to study each business
You need to check the fund its holdings, fees and how it works
Costs
You may have to pay for buying and selling and for changing rupees to dollars
You may have to pay for the fund for buying and selling and for changing rupees to dollars
Potential returns
Depends on how the company you choose performs
Depends on the fund’s holdings and how it works
Control
You choose the companies you own
The fund decides what to own based on its strategy
Neither option guarantees returns. An ETF can lose value if the companies it owns do badly like an individual stock can go down when a company has bad results or other issues.
Why do investors pick US ETFs?
1. Diversification with one investment
Imagine you have ₹10,000 to invest in the US market. Buying stocks may not let you own many companies depending on share prices whether you can buy partial shares and what the platform charges.
An ETF gives you a way to own companies with just one purchase. This can help reduce the effect of one company doing badly especially if the fund has a range of businesses.
Diversification does not remove all market risks. A tech-focused ETF for example can drop a lot if the tech sector is struggling.
2. Less need to research companies
Picking stocks means looking at financial reports revenue growth how much money the company makes, the competition and what the management is doing. You also need to keep up with company announcements and changes in the business outlook.
With an ETF your research is more about understanding the index or strategy the ETF follows, the fees, the holdings and how well it tracks its goal. This can be easier for people who want to own a market without looking at each company closely.
3. Access to a market or sector
ETFs can help you get into an index or a particular part of the US market. Of choosing each company yourself you can pick a fund based on what it offers.
The downside is that you have say in which companies are included. The fund’s performance also depends on its strategy and the companies it owns.
Why do investors pick US stocks?
1. More control over which stocks to buy
stocks let you choose the companies you want to own and how much you spend on each one. You can focus on businesses that you understand and believe in.
This control also means you have to do the work to research each company and watch for risks.
2. Chance to benefit from company growth
If a company does well and its stock price goes up you can profit from the increase. A good individual stock can do better than a broad market ETF over a time.
The opposite can happen too. A company can do worse than the market even if the whole US market is doing well.
3. Direct access to businesses
An individual stock might be right for people who have studied a company and want to own that business directly. An ETF may include companies that you would not have picked on your own.
The key is to not mix knowing a company’s brand with making an investment. The companys price its financial health and future plans still matter a lot.
What costs should Indian investors consider?
Investing in US stocks and ETFs can cost more than the price of the stock.
Brokerage and platform fees: Check if the investment platform you use charges for buying, selling or holding US stocks.
Currency conversion: Changing rupees to dollars may have some fees or a spread.
ETF expense ratio: ETFs have fees that affect your returns over time.
Bid-ask spread: The difference between the price you pay and the price you get can add to the cost for less common ETFs.
Other costs: Check the fees on the platform and any charges for sending money or using a bank.
For example if you put in ₹10,000 the actual amount invested in the stock or ETF may be less after conversion and transaction costs. Look at the cost not just the fee advertised.
How are US stocks and ETFs taxed in India?
Indian residents who invest in US-listed stocks or ETFs should know how their gains and dividends are taxed in India.
Short-term capital gains (STCG): If you sell shares or ETFs you have owned for 24 months or less the gains are usually taxed at the income tax rate you fall into.
Long-term capital gains (LTCG): For these investments gains from assets held than 24 months are usually taxed at 12.5% without adjusting for inflation. This rate and the ₹1.25 lakh limit for some listed shares and funds do not automatically apply to US-listed stocks. Sources: Income Tax Department, Geojit
Dividends: Dividends from US stocks and ETFs may face US withholding tax. Are taxed in India based on the rules. Qualified investors may be able to claim a foreign tax credit in India. This depends on conditions and documents.
Your tax situation depends on where you live what kind of investment you. The rules that apply. Talk to a tax expert for help on your situation.
How should you pick between US ETFs and individual stocks?
The best choice depends on your goals, how much you know. How much risk you can handle.
An ETF could be an idea if you want to own a wide range of companies without picking each one yourself. An individual stock might be better if you have studied a business and are okay with the risk of that company.
Some people use both: ETFs for general market exposure and individual stocks for chances. If you go this way check the ETF’s holdings to make sure you are not adding more of the businesses you already own.
Before you start think about how you want to invest your emergency savings, how your whole portfolio is set up and how much loss you can take. US investments bring in currency risk because the value of your investments in rupees can change when the rupee and dollar rates go up or down.
What should retail investors take from this?
US ETFs and individual stocks serve needs. ETFs help with spreading out your investments while individual stocks give you say over which companies to own.
Neither is always better. Look at the companies you own the costs, the risks and how taxes work before making a choice. For investors the goal should be to pick an approach that fits your money goals instead of just going for a company or fund that has done well recently.
Frequently Asked Questions
1. Are US ETFs than individual stocks?
Not really. Broad-market ETFs can reduce risks from one company. They are still affected by market drops. ETFs that focus on an area can be riskier.
2. Can Indian residents invest in US ETFs?
Yes Indian residents can access US-listed ETFs through platforms that offer international investing depending on the rules, platform availability and how money is sent.
3. Do US ETFs pay dividends?
Some ETFs give out dividends from the companies they own. How. How often depends on the fund’s investments and how it decides to distribute money. Dividend income may be taxed in the US and, in India.
4. Are US stocks taxed differently from stocks?
Yes. US-listed stocks don’t get the same tax benefits that some Indian stocks do. How long you hold the stock what kind of investment it is and the tax rules decide how it is taxed.
5. Can I buy both US ETFs and individual stocks?
Yes. Some people use both. Before you do look at the ETF’s holdings and your whole portfolio to avoid owning the companies or sectors too much.
