Investing in the US market has gotten a lot easier but there are some factors that one should be aware of as they can have a bearing on the returns.
The big question, however, is why should one invest in the American market? Well, because it is home to some of the best companies that have a global presence and the correlation between Indian and the US equity markets makes it an interesting play.
The recent listing of Robinhood on Nasdaq is a perfect example of how Indian investors can diversify their portfolios in assets that are not yet available in India.
A volatile home market, a continuously shifting economy and shrinking income have encouraged many investors to add high-performing US stocks to their portfolios.
Stockal data for FY21 shows that Indian investors haven’t limited themselves to FAANG stocks but invested in over 5000 securities.
Before making an investment decision, investors should, however, be aware of the complete picture and the functioning of the market in which they are investing.
Here are some important facts to know before putting money in US markets or cross-border investing:
1 Regulatory framework
Just like we have the Securities and Exchange Board of India (SEBI), the US stock market is regulated by the Securities and Exchange Commission (SEC). It is one of the oldest and well regulated stock markets in the world.
Since the 1930s, SEC has ensured strict enforcement of laws and regulations, setting some of the highest standards of transparency and integrity, a must for investor protection and confidence.
Historically, US markets have outperformed Indian markets. Even though past performance is no guarantee of future returns but anecdotal data for the last 10 years shows that the US markets outperformed Indian indices by 8-15 percent.
2 No double taxation
When investing in US markets, cross-currency exchange rates should be taken into account. The two currencies involved would be the US dollar and the Indian rupee.
Before a stock is purchased, the amount is converted into dollars. Subsequently, any profits or dividends that you earn in dollars are converted to rupees, with currency fluctuations impacting returns.
With Stockal though, investors can transfer money to and from the brokerage account and avoid this risk. In terms of taxes, dividends are taxed at 25 percent in the US.
Thanks to the double tax avoidance agreement between the two countries, this tax can be used to offset the tax that the investor would otherwise have to pay in India.
However, one still has to pay long-term capital gains tax if stocks are held for more than two years or short-term capital gains tax if the duration is less than two years.
3 Take advantage of the LRS scheme
Indians can invest up to $250,000 in US stocks under the Reserve Bank of India’s Liberalised Remittance Scheme (LRS). LRS is generally used to fund education, travel or purchases.
An amount above $250,000 needs RBI’s clearance. With platforms like Stockal, Indian investors can invest with 5 major partner banks, and avoid the hassle of filling up forms and bank rounds.
As discussed above, investing in US markets involves the conversion of the rupee to the dollar. In the initial days, funds will have to be remitted or transferred to the brokerage firm for funding the trading account.
There can also be transaction charges, which can be a flexible percentage of the total traded amount or volume or a fixed dollar amount.
In addition to these, there can be charges like brokerage, account maintenance, money transactions and bank charges. It is always better to read the document and the fine print carefully or talk to the agent.
5 Innovation hub
Last but not the least, before investing in US stock exchanges, it is important to have sound knowledge and the latest information about the market.
TradingHours.com pegs the New York Stock Exchange’s market capitalisation at around $25 trillion followed by Nasdaq at over $22 trillion.
The US market hosts top companies like Apple, Amazon, Google, Tesla, etc and most leading US stocks have a stellar record of generating consistent returns over the long run along with healthy dividend payouts.
Investors can be part of the global names that have created tremendous shareholder value and continue to do so.
Indians are investing in the US equities heavily through global platforms like Stockal, and thematic ETFs have been the next big investment avenues among Indian investors.
Some of the most popular ETFs on our platform include ETFs with themes focusing on artificial intelligence, blockchain, renewable energies, electric vehicles or index ETFs.
At Stockal, we have seen about 18-20 percent of investments in these ETFs. We also have Stockal’s Curated Portfolios (Stacks) that have given over 20-30 percent CAGR and are a big hit among Indian investors.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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