Updated: Mar 17
Global investing has become a powerful tool for portfolio diversification, stable returns, and better ROI. But an Indian investor is wary of factors like tax implications, currency exchange policies, and more. To guide you to make an informed investment decision while investing in the US Stock market, here we talk about how global investing is advantageous and must-know commandments.
A decade back, in 2011, Tesla Motors, Inc. (TSLA) sold its shares at an opening price of $4.92 per share. Today its share price has skyrocketed to $1089 per share. Imagine if you'd invested $1,000 in its shares back in 2011, then what would your investment be worth today?
That is the power of global investing; the returns, especially in the US markets, can be jaw-dropping.
Global investment is a strategy of selecting international investment instruments as part of your portfolio. Its benefits include:
Diversification of investment portfolio
De-risking your investments
Getting away from the volatile Indian market and a shifting economy
Investing in globally competitive, high-performing US stocks
How to invest in US markets?
With technological advancement and access to information, global investing has become a powerful tool for portfolio diversification and better returns. Indian residents can consider cross-border investing through multiple channels.
There are two broad ways of investing in the US stock market for Indian residents:
Direct investment in stocks
Indirect investment in stocks via mutual funds or ETFs
However, like any other investment product, it would be prudent if the investors acquaint themselves with the required know-how of the US economy functions.
Things to consider when investing in the US markets
Investing in the US markets has now been simplified and easily accessible, but you should understand some critical factors to understand the risk and opportunities on the returns.
1. The Liberalized Remittance Scheme
An Indian investor can enter the US stock market under the RBI’s Liberalized Remittance Scheme or LRS. According to this scheme, to invest, you can remit up to USD 250,000 per year. This limit is per person, which includes minors. If you are a 4-member family, you can remit up to USD 1 million annually. Any amount beyond the limit of $250000 would require RBI’s permission.
LRS quota is generally utilized to make investments like US securities, real estate, bank deposits, plus all overseas expenses like education, travel, or purchases. With Stockal’s smart, simple and secure platform, you can begin investing from $1 or fractional shares.
2. Regulatory Framework
The US stock market maintains integrity and fairness with a primary regulatory authority called the Securities and Exchange Commission (SEC). This U.S. government agency is in charge of the nation's securities industry. It monitors transactions, maintains a high standard of transparency, and prevents fraud or any deceptive act.
3. Currency Conversion
Investing in US markets is impacted by currency fluctuations, as there is an involvement of two currencies, the US Dollar ($) and the Rupee (₹). Stock purchase in the US market and gains or dividends earned both need currency conversion. These are affected by foreign exchange currency fluctuations.
A judicious investor has to consider currency fluctuations as the portfolio gets appreciated or depreciated synonymously. You are indirectly investing in the US Dollar and bearing the associated gain/risk.
To understand the scenario better, consider the fact that the Indian Rupee has depreciated against the US Dollar by an approx 2.5% per year. The good news is that this has worked out as an advantage for Indian investors in US markets.
4. Tax Implications
There are two types of tax implications on stock trading in the US that you must understand to gauge the net worth.
Tax on Dividends – The dividend earned from US stocks in India is taxable at a flat 25% rate. That means for a company dividend of $100, an Indian investor will receive $75. Such tax is deducted at source in the US before being paid and can be claimed as set-off by Indian investors when they file their tax return in India, just like the usual TDS.
The dividend received as cash or reinvested is added to the income of the Indian resident and is taxable under the normal tax slab rates. As per the Double Taxation Avoidance Agreement (DTAA) tax treaty signed between India and US, the investors are provided a relief since they need to pay tax only in one country. They are saved from paying double tax in both countries.
Capital Gains Tax - The tax system in the US is designed to benefit the long-term investor. Short-term capital gains are taxed at a higher rate as compared to long-term capital gains. When you earn capital gains, you are not liable to pay any taxes in the US; however, you will need to pay taxes on this gain in India. The two capital gains are:
# Long-Term Capital Gains (LTCG) – With a stock holding of more than two years, while selling and earning capital gains, you will be liable to pay a capital gains tax at the rate of 20% plus all applicable fees and surcharges.
# Short-Term Capital Gains (STCG) – With a stockholding of fewer than two years, while selling and earning capital gains, the profit will be added to your taxable income and taxed as per the income-tax slab applicable to you.
5. Market Analysis
Investing in the US stock markets requires sound knowledge and updated information. US market hosts globally competitive and innovative companies like Netflix, J&J, Google, Microsoft, 3M, Amazon. . While they have a good track record of returns in the long run, along with lucrative dividend payouts, it is essential to analyze the global market and economy to make informed investment decisions.
How does it work?
Similar to opening a brokerage, Demat, and bank account to trade in Indian equities, you open a broking, custody, and bank account to trade in US securities. During initial account setup, it's required to transfer funds to the brokerage firm for funding the trading account. There will be associated charges of the brokerage account, its maintenance, monetary transactions, and other bank charges. The transaction charges can be a flexible percentage of the total traded amount or volume, or it may be a fixed fee amount.
Understand the process, be diligent, reduce the risks, and put your fears to rest. Learn how to diversify your portfolio with US equities and earn 30%+ YOY returns with well-crafted, pre-built portfolios here.