When we think about diversification in stock investments, we think about investing across different sectors, industries, and market capitalizations. However, very few investors tend to look beyond the country borders for investment opportunities. For e.g a retail India investor, there are several investment opportunities available in the US markets. They can choose between investing in mutual funds, ETFs or even use the LRS route to buy direct equities in the US markets.
Why Do People Invest in the US Stock Market?
Diversification with Global Investments:
US listed companies have the largest total market cap by far. Many of the big US firms get their revenues from across the world (almost 40% of S&P 500 revenue is from outside US). So you are really getting a global exposure, and not domestic.
There is a vast universe of stocks available in US markets. Some of those are not compliant with Indian regulations. Winvesta has excluded such stocks and ETFs containing such stocks from their selection so you will not have to worry.
US equity indexes has beaten every other global index in the last decade and over the past five years given 92% gain in the S&P 500, crushing the world benchmark’s 64%, the widest gap since 1970.
Investing in the US also means you are investing in USD as a currency hedge , so you will get all the upside (or downside) from USD-INR appreciation. Every time the rupee falls against the dollar you’ll know you have some wealth that’s growing. In July 2010 the dollar was equal to around Rs 46, which is now around Rs 75 a decade later. Therefore, an Indian investor who invested in the US markets a decade back would have seen phenomenal returns.
Taxes for Investing in the US Stock Market?
Tax in Foreign Country:
There is no capital gains tax for foreigners. The dividends are taxed at flat 25% for Indians, and tax is withheld by the broker, so there is no need to file tax in the US.
Fortunately, the US and India have a Double Taxation Avoidance Agreement (DTAA), which allows taxpayers to offset income tax already paid in the US. The 25% tax you already paid in the US is made available as Foreign Tax Credit and can be used to offset your income tax payable in India.
Tax in India:
The amount of taxes you have to pay in India depends on how long you hold the investment. The threshold for long-term capital gain is 24 months, with the rate of 20% with indexation benefit. If you sell a stock in less than 24 months, capital gains are considered short-term and are taxed according to your income tax slab.
How Can You Invest in The US Stock Market From India?
You need a broker to help you trade US stocks from India. You will have to create a trading account with a brokerage house and get your KYC done by giving your PAN, Bank Account, Voter ID, Bank Statement, etc. Post this you’ll need to transfer funds into your account to trade US stocks.
Routing your international investments through brokerage firms is a better approach as they offer investment packages based on different themes. A few international brokerage firms like Interactive Brokers, TD Ameritrade, Charles Schwab International Account etc permits Indian citizens to set up an account and trade in US stocks, mutual funds, etc. In fact, US-based brokerage like ‘Interactive brokers’ also has an office in India where you can open your overseas trading account.
You need to be conscious on brokerage fee levied by brokerage firm. Some brokers have complex fee structures that make it harder to figure out what you’ll be paying.
How do I Fund my account?
Before you consider investing in global stocks, you need to be aware of the RBI’s Liberalized Remittance Scheme (LRS). LRS determines how much one can invest abroad by converting Indian rupees to US dollars and how exactly the transaction has to take place. RBI allows investing in shares outside India up to a certain limit. According to this article, Indians can invest up to $250K annually overseas.
For remitting the money to your brokerage account, you may need to visit your bank branch (depending on the bank, ICICI is fully digital). And fill the relevant form (A2 for outward remittance). That is the only physical step required. I had to go to IDFC First branch, but my money was remitted the same day and I was able to start trading the next day after downloading the Win-vesta app.