Are you planning to diversify your investment portfolio across geographies? The interest in the US stock market seems to be fast increasing among the Indian investors due to many reasons such as Geographical & Currency Diversification, Access to Hyper Growth Companies and strong corporate governance awareness & understanding the importance of investments and portfolio diversification, and most importantly, having the desire to be a part of some well-built global companies like FAANG companies whose products have become a part of our daily lives.
The US market is worth 55% of the MSCI ACWI and over 60% of the Developed World index. US companies generate over 40 percent of their revenue from global activities. Exposure to US stocks is a good proxy for global exposure because most of the world’s largest companies are located in broader markets like the US.
Minimum amount to invest in US stocks
Most of us generally buy a ‘full’ share of a company listed on the exchanges. But how do you buy one share of Amazon, one of the most valuable companies in the world, which costs you $3027 Or Alphabet Inc. at $2021?
For many investors, it is not possible to diversify their portfolio in these expensive stocks, it requires huge capital. But fractional investing helps you to apportion your capital to invest in each of these companies as per your choice. Fractional investing is the ability to buy less than one share. It works well for high-priced shares of firms. So, it is possible to invest in expensive securities like Facebook, Amazon, Apple, Netflix and Alphabet’s Google etc. to diversify your portfolio even if you have limited capital. Indian regulations, however, do not allow fractional investing/ownership in Indian stocks as of now.
Know the process involved to start investing
Opening a foreign trading account is simple and gets completed in 2-3 business days with the brokerage house taking care of LRS and other KYC formalities. Account opening formalities involve providing regular identity and address proofs like PAN card and Aadhaar card.
There are two easy ways for you to start investing in the US stock market. One way is to use an 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. In fact, US-based brokerage like Interactive brokers also has an office in India where you can visit, get your queries answered, and open your overseas trading account.
The other way is to use a local brokerage firms that provides foreign stock trading facilities like ICICI Direct, Vested, HDFC Securities etc. has a tie-up with the foreign brokers. They have made it very simple to open your overseas trading account with their partner (foreign brokers).
What are the charges involved?
Cost of investing in the US stocks can include the following:
Account opening fees for setting up the investment account and Brokerage expenses for purchasing securities vary from one entity to another depending upon plans offered. For example,
ICICI securities has 2 plans:
The first one is global starter plan at ₹999 per year with brokerage of $2.99 per order. The second one is global advantage plan at ₹9999 per year with brokerage of 1US cent per share.
HDFC securities has three plans:
The basic plan has no account opening fee and brokerage charge of 2.99 per order. The silver plan has a subscription fee of ₹3999 per year and brokerage of $0.99 per trade share beyond. The last plan that is a gold plan has a subscription fee of 13999 per year and brokerage charge of 1US cent per share
Vested has two plans:
The first plan that is the basic plan has one-time account opening fee of ₹399, whereas the premium plan has no account opening fee. There are no brokerage charges.
Remittance expenses – Flat charges that usually vary from ₹250 – ₹1000 per transaction across banks. Banks usually have a mark-up on the exchange rate when remitting or receiving currency.
Section 206C (1G) of Income-tax Act, 1961 imposes the TCS at the rate of 5% on all Forex remittances or forex transactions if the amount is above ₹7,00,000.
FOREX REGULATIONS
In order to facilitate global investments for retail investors and individuals, the Reserve Bank of India (RBI) introduced the Liberalized Remittance Scheme (LRS) which allows resident individuals to remit up to $250,000 during a financial year to another country for investments and expenditure purposes. If an investor wishes to remit over $250,000 in a financial year, they are required to get special permissions from the RBI.
TAXABILITY
To understand tax implications for the investments made in the US stock markets, it is imperative to understand the type of gains from the investment. There are the following gains:
Dividends
it is taxed at a flat rate of 25%. The amount of taxation will be withheld by the US companies, and only the balance 75% will be paid as a dividend. Due to the Double Tax Avoidance Agreement (DTAA), the tax withheld in the US can be set off against the tax liability in India.
Capital Gains on sale
If the investment is sold at a profit, there will be no tax implication in the US on the gain. However, as an Indian resident, the following will be the tax implications in India
LTCG (holding period was for more than 24 months)- will be taxed at 20% plus applicable surcharge and fees
STGC (holding period was for less than 24 months) – will be taxed as per slab rates applicable to the investor.
Conclusion
As an investor, finding ways to diversify your portfolio is essential to grab better opportunities. If we see the history of returns, Financial companies dominate the Indian indices while us market favour tech firms. However, before you start, remember to choose the right adviser for you to mitigate the risk and loss of your investment whether it is Indian market or the US market.
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