From creating assets to investing in fixed deposits, bond certificates, real estate and commodities, Indians have forayed far and wide to find ways of creating wealth. The focus is now on multiplying wealth, rather than just creating it. In effect, making your hard earned money grow beyond tangible assets and geographical locations.
Regular investing helps you take advantage of natural market fluctuations. When you invest an amount consistently, over time, you can create wealth that grows and acts as an alternative income source to invest in physical assets, family objectives, and plan for milestone events like children’s education in India or overseas. One of the newer asset classes which is gaining popularity these days in US stocks. Since investing in foreign markets is relatively new, here’s a list of things you should consider while starting your journey.
Where Should You Start Investing?
Most Indian investors prefer the U.S. stock markets when it comes to exploring global markets as it is home to the most developed, liquid, flexible, and efficient financial markets in the world. A wide range of funding sources – from banks and investment firms to venture capitalists and angel investors – enable innovation and expansion, giving companies in the United States a strategic advantage.
With fractional shares, it is no longer required to put a huge sum of money to be able to invest in the top stocks like Microsoft, Zoom, Amazon, Netflix and Google. Owning a piece of the most valued companies is no longer just a dream.
Here are some of the trusted ways you can create wealth in U.S. markets:
Investing directly in equities requires a certain degree of expertise, which could otherwise result in losses for investors. However, you can opt for mutual funds and exchange traded funds (ETFs) in which an investment into a fund provides you access to several U.S. stocks at one go. ETFs also allows you exposure to certain sectors like healthcare or energy by buying an ETF that tracks these sectors instead of buying separate stocks.
Today, Indians are also keen to invest in theme-based ETFs, which, rather than investing in particular sectors, focus on emerging themes like energy, electric vehicles, cloud computing, mobility or even global ETFs that offer broad diversified exposure to U.S. and global – European, BRICs, and emerging and frontier equity markets. Since ETFs are passively managed, the expense ratio (how much of a fund’s assets are used for administrative and other operating expenses) is lower as compared to actively managed mutual funds.
While the Indian stock market is known for long-term growth opportunities to investors, diversifying the portfolio across nations brings in the much-required stability to the stock portfolio over the long term. You can straight up open an overseas trading account with a domestic brokerage that has tie-ups with fintech’s which provide a global investing platform.
These fintech’s in return have tie-ups with foreign brokers (the broking accounts are typically insured by SIPC and FDIC up to $250,000 in stock equivalent and another $250,000 in cash equivalent respectively) who act as intermediaries and execute the trades on your behalf in the foreign market. This makes the whole process of investing in a global market seamless and secure.
In addition to providing an edge to diversify your domestic portfolio, the INR-USD exchange rate acts favorably for Indian investors.
You can also invest in foreign stocks by trading in mutual funds listed on exchanges outside India like U.S., Japan, Shanghai, London and Korea. This is perhaps the easiest approach to invest in foreign stocks as it saves you from the process of opening an overseas trading account.
While international mutual funds have benefits such as diversification by geography and portfolio, it comes with its own set of risks and rewards. The country’s market fluctuation or any volatility in the sectors on the exchange can have a significant impact on the overall performance of the fund. Also, these funds come with a regular expense and also the expenses within the purview of the international scheme in which they are investing.
As a result, the cost will be relatively high when compared to the other standalone funds. You would also need to check your total expenses before you begin investing in these funds.
Important Tips To Keep in Mind Before Investing In the U.S. Market
The Concept of Double Taxation
Investing in U.S. stocks can be daunting if you are unclear about taxation on dividends and capital gains for short term and long-term investments. If you receive dividends from the US market companies in any particular financial year, it will be taxed at a flat rate 25%.
Long-term gains (on stocks held over 24 months) derived will be taxed at 20% in India with no tax implications in the US. In terms of short-term gains (on stocks held for less than 24 months) however, the amount received will be taxed according to the slab rates provided by the Income Tax (IT) department.
If you are receiving profits after tax deducted at source, you can state the same while filing your taxes. India has double tax avoidance agreements with over 88 countries like the U.S., Australia, Canada, China, Korea, Russia, UAE, UK and the tax withheld in the U.S. can be set off against the tax liability in India.
The Fluctuating Nature of Exchange Rates
One of the important factors that impact your earnings in the US markets are the value of INR w.r.t to the U.S. dollar. In the past few years there has been a drop in the price of rupee by 4% to 5% which can cause the investor to bear the associated risks of currency fluctuation.
One of the major advantages of investing in U.S. markets is the American dollar. As it appreciates in value, so do your investments, even if your portfolio itself is unchanged. Hence, the better the dollar performs, the higher will be your portfolio growth.
It is also key to keep in mind that the Indian banks do charge a minimal amount for foreign exchange which can be an additional fee of 0.5% to 2% depending on the choice of bank and investment advisor. The best way is to save a lump sum and then transfer to reduce recurrent transaction costs.
Availing Benefits of Liberalised Remittance Scheme (LRS)
An Indian resident, investing in the U.S. can make purchases of stocks while following the maximum limit ($250,000 per annum) through an authorized finance partner. According to the reformed taxation rules, all the foreign remittances above INR 7 lakh in a fiscal year will incur a 5% tax collected at source (TCS).
This tax collected during the remittance can be claimed at the time of the annual tax filing with form 26 AS and is not an additional expense. Moreover, this benefit of LRS is not just limited to purchase of stocks but also for education loan, travel and transfer of money to a non-resident of India.
Selecting the Right Platform
With a wide variety of options in the global investment space, one must practice due care while selecting the right platform provider for his global portfolio. Your choice of platform should be able to offer you a secure brokerage account with simple digital processes. Moreover, the platform should be able to offer a wide variety of stocks and ETFs across sectors in the U.S. markets. You should also research well and choose a platform which is renowned in the global markets and enjoys partnership with brokerage firms in the U.S.
Some other considerations can be the cost of setting up an account, banking tie-ups of the investment platform, quality customer service and other unique offerings which will make investing a rewarding experience.
Investing in U.S. markets can often feel very overwhelming due to new terminologies, a variety of processes and formalities. However, with practice and support of trusted platforms you can easily master the art of investing in the U.S. while sitting anywhere in India. You can also listen to analyst debates, read articles and case studies that deep-dive into the nitty-gritties of global investment thereby keeping you informed and updated.