They say diversification is the only free lunch in investing. We all understand the importance of diversification and wish to diversify our investments. If you are wondering how to diversify your investments beyond India, you are in the right place. Let’s explore one of the most talked-about investments for Indians after India: the US stock market.
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In this article, we will explore:
- Different ways to invest in U.S. stocks
- Platforms available for Indian investors
- Tax implications and important considerations
But before that, why should one consider investing in US stocks?
Diversification
As we have stated, the primary objective of investing in the United States is diversification. This allows you to diversify across geography. The US market is considered to be the most developed market in the world.
Currency benefits
The US dollar is a vehicle currency to the world, and we see the USD appreciating against the rupee. If you invest in the American market, your investments are in dollars, and appreciating dollars increases your holding value apart from the usual returns.
Why the US and not any other country?
You see, all the major companies of the world are listed in the United States; you get to invest in the biggest innovators of the world.
There are broadly three ways by which one can invest in US stocks:
- Mutual funds
- ETFs
- Direct stocks
Investing in the world’s biggest companies can be a game changer for your portfolio. Companies like Apple, Amazon, Meta, etc are all listed in the United States.
Let’s explore the ways to invest using mutual funds
Investing in the US through mutual funds is just like investing in equity mutual funds in India. There are plenty of mutual funds that invest in US stocks. They invest either directly in US stocks or use a fund of funds.
Direct mutual funds buy stocks from the exchange, and some examples of mutual funds investing in the US are: Franklin India Feeder Franklin US Opportunities, ICICI Prudential US Bluechip, etc.
A fund of funds is a way where an asset management company in India buys units of another mutual fund in the US.
Examples of fund of funds are: Kotak Nasdaq 100 FoF, Edelweiss US Technology Equity FoF, etc.
Investing through ETFs
Just like we buy ETFs in India, we can buy ETFs from India that invest in US stocks, although we have limited options of ETFs tracking US indexes.
Some popular ones include: Motilal Oswal Nasdaq 100, Mirae Asset FANG+, etc.
Investing directly in US stocks
Some investors prefer investing themselves in specific stocks; for them, we have platforms like
INDMoney, Interactive Brokers, HDFC Securities, Vested, etc.
Be mindful about the platform and transaction charges, as some platforms charge high fees in such cases, recurring investments like SIP could be an expensive affair than lumpsum, hence may not be cost-effective for retail investors. How does it work? Through these platforms, you are transferring money to a US broking firm and making purchases, so avoid doing so through unknown platforms.
The RBI limitation on investing overseas
The Reserve Bank of India (RBI) has imposed a $7 billion limit on overseas investments for the entire MF industry in order to manage the foreign exchange reserve. Additionally, there is a $1 billion limit per Asset Management Company (AMC), meaning no single AMC can invest more than that in international markets. The industry has already breached this limit in February 2022.
If you try to buy mutual funds, they allot you units only when existing investors redeem their money, as they cannot issue new units due to this limit.
Even the ETFs are trading at their premium due to this. So make sure to check the iNAV of overseas ETFs before investing.
Now that we have covered ways to invest in the US. What about taxation?
Dividend taxation for US stocks
In the US, the dividend and gains are taxed separately, just like in India.
Dividend tax in the US: The U.S. government deducts 25% tax on dividends (e.g., if Apple pays $50 in dividends, you’ll receive $37.5). However, you can claim credit under DTAA (Double Taxation Avoidance Agreement) while filing taxes in India.
Capital Gains Tax in India
For US investments, the taxation tenure for STCG is less than 24 months compared to that of 12 months for investments in India.
- Long-term (held >24 months) – Taxed at 12.5%
- Short-term (held <24 months) – Taxed as per investors applicable tax slab
Liberalized Remittance Scheme (LRS): to regulate the foreign exchange reserve, the RBI allows Indian residents to remit up to $250,000 per financial year. Till $25000, there is no tax collected at source or TCS.
If you are looking to diversify your investments beyond India, the US is a great option.
For beginners, mutual funds are a great option, as ETFs are trading at a premium, and if you are a small investor, LRS will be difficult to understand, especially taxation and filing could be overwhelming for individuals. Those who have a large sum of money and are comfortable with research can try direct stock investing, else mutual fund route is safer and hassle-free for retail investors consulting a financial advisor before taking any decision would help.
