The US stock market is among the top-most choices to invest in when diversifying your portfolio across geographies. The country is home to the best technology and plenty of wealth-creating businesses that have proved to be great investment opportunities over time. Moreover, the low correlation between the Indian and US equity markets makes it a lucrative geography to invest in. But, the question remains. Should you invest in the US markets?
Before you decide here are a few things to keep in mind before investing.
Indians Investing from India
You can buy US stocks and ETFs directly from India through various new-age FinTech-company apps. It allows you to invest in fractions of shares. Alternatively, you can also invest in ETFs in the US market to diversify your risk based on your appetite and select the exposure to large-cap, mid-cap, and small-cap stocks. Moreover, NSE IFSC (NSE International Exchange), a National Stock Exchange subsidiary has recently opened trading in select U.S. stocks.
Indians living in the US Investing via the ‘Liberalized Remittance Scheme’
You can invest in US Stocks under the RBI’s Liberalized Remittance Scheme (LRS). The scheme allows every Indian resident to remit USD 2, 50,000 per year. This remittance limit is per individual, including minors, which means that a family of four can remit up to USD 1 million every financial year. The quota includes investments like US securities, real estate, bank deposits, etc., and overseas expenses like foreign travel and student education.
No double Taxation
You may consider tax implications on foreign investments so that your efforts are rewarded. India and the US have a Double Tax Avoidance Agreement (DTAA). This agreement helps to prevent taxing the same income twice. Furthermore, it is vital to consider dividend taxation, which is different from the Indian market. A foreign investor subject to the DTAA benefit pays a flat 30% in taxes for the US stock dividends. Check the newly-introduced tax – Tax Collected at Source (TCS) if you plan to invest through the LRS scheme.
Broking and other transaction charges
You need a US brokerage account to invest in US stocks directly. Nowadays, getting a brokerage account is not a challenge because of a simple digital process with various platforms. Before you sign up with a platform, check for the account opening fees, annual maintenance charges, and other associated costs.
Over the longer term, one of the chief risks to your portfolio is the country risk. A sudden change of events in the internal political or economic situation can wipe a large chunk from your portfolio. Diversifying your portfolio across geographies brings an element of safety and the potential of a high-risk-adjusted return to your portfolio.
Think again; if you believe that your investment portfolio in India is well-diversified across market capitalization, sectors, and assets classes. Diversification remains incomplete unless you take exposure to different geographies too.
Dollar hedging – Impact of Foreign Exchange
A key factor while investing in the US market is the exchange rate fluctuation. The Indian Rupee has seen an average decline of 3 to 5 percent against the US dollar in the last few years. You invest in the US Dollar and bear the associated risk when you invest in the US markets. The appreciation in the US Dollar increases the value of your portfolio and vice versa.
When remitting money to invest in the US, your Indian bank may also charge you an FX conversion fee or spread. This fee can range from 0.5-2% of the amount remitted and depends upon the bank. Despite additional charges, dollar-hedging still makes sense to help your portfolio grow.
One of the unique features of investing in US stocks is owning fractional shares. Some big stocks such as Apple or Google are trading at USD 200 to USD 2000 or more. But you can still own them. If a share trades at USD 300, you can still own half-share if you invest USD 150.
Investing in Innovative Business Models
The US market is home to several corporations that lead their sectors with unique offerings. Indian investors cannot be a part of growth stories at home as businesses must meet SEBI’s eligibility criteria before going public. However, that is not the case in the US market. Investors can take advantage of investing in innovative models such as Amazon, Uber, Tesla, Facebook, and others. Investing in the US markets is promising as it offers investors exposure to international markets and some of the best-performing MNCs.
Lastly, both the Indian and the US markets have their advantages. However, in the new investing climate with access to the international market, it’s easy to see how investing in the US can be profitable. It is because the market has global exposure and is home to some of the most promising companies in the world.
While you seek geographical diversification through investing in US stocks, don’t forget the growth opportunities available back home. Despite several hurdles in the latter part of FY22, Indian stock markets outperformed most of their foreign peers. The Blue-chip index Nifty zoomed 19%, however, the US S&P500, UK’s FTSE100, and French benchmark CAC40 grew 16%, 13%, and 11%, respectively.
To invest in the stock markets of the fastest-growing emerging economy and ride the multibagger opportunities, subscribe to our 5 in 5 Wealth Creation Opportunities.