How to Invest in US Stocks from India?

Many of us, sitting here in India, wonder if we can own a piece of the behemoths such as Apple, Google, Microsoft, Meta, etc., which have repeatedly proved to be multi-baggers. Adding stocks from the developed markets adds a new flavor and stability to your existing portfolio. Here are ways to invest in US stocks from the comforts of your home in India.

Investment in the US Stock market:

A local broker with ties to stockbrokers in the US or an international broker with a presence in India has two options for opening an offshore brokerage account under direct investments for trading in US stocks.

1. Direct investment: In the first case, domestic brokers function as middlemen for transaction execution by collaborating with dealers in the US. There are mandated limits on the number of transactions and constraints on investment in specific securities. Given the exchange rate, you may not be able to buy a sizeable portion of the companies you desire. Hence, you can buy fractional shares in the companies of your choice.

2. Indirect investment: The other approach to investing in US stocks is via the mutual fund route. There are two different varieties of mutual funds that invest in international markets.
1. The first one is called a fund of funds, i.e. an Indian mutual fund that helps you to invest in a global mutual fund.
2. The second is a local mutual fund that invests directly in foreign stocks.

However, the Indian mutual funds that invest in international schemes typically have higher expense ratios. A management cost for the underlying overseas scheme is charged for the FOF, i.e. fund of funds along with the cost of managing the Indian mutual fund scheme.

Exchange Traded Funds, or ETFs, are similar to Indian mutual funds in that they invest in a set of stocks traded under a single fund. However, unlike the mutual funds available in India, ETFs are traded on exchanges with real-time pricing, much like how stocks are traded. ETFs can also be themed, wherein they tend to gain exposure to specific industries by purchasing an ETF that tracks an industry, such as healthcare or energy. There are ETFs that offer exposure to foreign stocks. They can be considered if you intend on gaining exposure to overseas stocks.

Regulations for investing in the US Stock Market:

All mutual funds in India registered with the Securities and Exchange Board of India (SEBI) are allowed to participate in the global markets up to a maximum amount of $7 billion. In comparison, investments in foreign ETFs have a maximum cap of $1 billion as mandated by the RBI, i.e. the Reserve Bank of India. All fresh investments in international equities have been suspended from January 2022 since the overall amount of global investments these businesses made crossed the limit of $7 billion. At present, any fresh investments in foreign stocks are paused.

It's also important to know about the RBI's LRS (Liberalised Remittance Scheme) guidelines, which allow resident Indian investors to invest in foreign schemes up to the maximum limit of $250,000 per annum without needing further authorization.

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Risks & Challenges of Investing in US Stocks

1. Market Volatility and Economic Factors:

Market Fluctuations: The US stock market, like any other, experiences periods of volatility due to various factors such as changes in interest rates, inflation, economic data releases, and global events. Market corrections and bear markets can lead to significant short-term losses for investors.
Economic Indicators: US economic indicators such as GDP growth, unemployment rates, consumer spending, and corporate earnings reports can greatly influence stock prices. A downturn in the US economy can negatively impact the value of your investments.
Global Events: The US market is highly interconnected with the global economy. Events such as geopolitical tensions, trade wars, pandemics, or natural disasters can trigger widespread market instability.

2. Regulatory and Political Risks:

Regulatory Changes: The US government can implement new regulations or change existing ones that could affect specific industries or the overall market. For example, changes in tax laws, financial regulations, or environmental policies can impact company profitability and stock prices.
Political Instability: Political events, such as elections, government shutdowns, or changes in administration, can create uncertainty in the market. Policies introduced by a new government, particularly those related to trade, taxation, or healthcare, can lead to market fluctuations.
Sanctions and Trade Restrictions: The US has been known to impose sanctions or trade restrictions on certain countries or companies. These actions can affect the stock prices of companies that have significant international exposure or rely on global supply chains.

3. Currency Risk:

Exchange Rate Fluctuations: As an Indian investor, you will need to convert your Indian Rupees (INR) into US Dollars (USD) to invest in US stocks. The value of the INR relative to the USD can fluctuate due to various factors such as changes in interest rates, inflation, trade balances, and global market sentiments. If the INR weakens against the USD after your investment, you could face losses when converting your profits back to INR.
Impact on Returns: Even if your US stock investments perform well, adverse currency movements can erode your returns. For instance, if the USD depreciates significantly against the INR, the value of your US investments could decrease when converted back to INR, reducing your overall gains.
Hedging Costs: To mitigate currency risk, some investors choose to hedge their currency exposure using financial instruments like options or futures. However, hedging can be expensive and may reduce overall returns. It also requires a deep understanding of the currency markets, which can add complexity to your investment strategy.

Taxes and charges applicable on US stock investments:

Taxation and costs are integral to investing, here will look at the different charges and taxes applicable to US stocks.

Under the Liberalized Remittance Scheme, a 5% TCS (tax collected at source) is applied to all remittances that total more than Rs. 7 lakhs in a given year.
Other costs include currency translation fees, transfer fees, and occasionally account setup fees. Brokerage fees are also levied on the purchase and sale of shares. The purchase or withdrawal impacts the foreign currency rate.
Investments in US stocks are subject to capital gains tax and dividend tax. Dividends are taxed at 25% for Indian citizens. As per the DTAA, i.e. Double Tax Avoidance Agreement, investors can avoid payment of taxes twice on the same income by claiming credit for taxes paid in the US. Capital gains tax is not applicable in the US. However, in India, you have to pay taxes on capital gains.

Long-term capital gains on US stocks: It will be regarded as a long-term capital gain if the foreign firm shares are held for more than 24 months or two years. The statutory rate of 20% plus the health and education cess would be applied on long-term capital gains from the sale of overseas equities that are not traded on the Indian market (plus a surcharge, if applicable). The cost of the investment will include the indexation advantage as well.
Short-term capital gains on US stocks: If the stocks have been held for fewer than 24 months, they are considered short-term capital gains. They are added back to income and taxed at standard rates.

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In a nutshell:

Investing in US stocks involves multiple considerations, including currency translation, charges, and taxes. Although it will add an excellent flavor to your portfolio, you must have ample knowledge before indulging in this asset class. Always remember to make informed and well-researched decisions about your investments.