Are you looking to put your money in international stock market or specifically invest in the US stocks? No worries, let’s discuss some crucial points for investing in the foreign stock market from India.
One of the reasons, I believe why international transactions are usually calculated in US dollars is because of the history of the economy of US among global transactions. During the late 19th and the early 20th century, while communism movement made its way to US like it did to a lot of countries (also sort of gave rise to fascism but what’s new right?), the US economy has more or less remained mixed with an inclination towards capitalism. It is therefore no surprise it was also one of the first few economies, if you count UK colonies as economies (#represent) to partake in international transactions, and stayed that way.
It is also no surprise that it therefore is one of the biggest economies in terms of economic value addition. I shall elaborate further.
Why Should You Invest in US Stocks?
I am happy to report there are more than one reason. I shall proudly also enunciate the fact that I shall make you scroll through all of them before getting to the how to. If you’re already convinced, that is.
1. Money but more…
Causal factors could be many, but the fact is that over the period of last few decades the US markets have outperformed the Indian ones in terms of value addition. It can be attributed to the rise of tech empires in Silicon Valley as much as it can be attributed to the insatiable appetite of America for oil. The fact is it happened, for example during the last decade, while DOW delivered a return of 196%, SENSEX maxed out at about 150%, which is clearly less. Clearly.
Moreover, during the same period, or let’s just say past few decades, the INR has shrunk in the international markets while USD has had growth, which kind of creates a notional loss, an opportunity loss if you will (down 44% in the last decade, if you’re curious. Or lazy).
2. Global Portfolio
I shall present to you the argument of closed economies of the dark pre-historic pre-computer trading desk ages. The thing is, within an economy, investments are usually the surplus left after consumption and savings. Now since marketplaces were physical, investment markets were also physical because there were huge communication barriers. A much more local approach, you see. You also know where I am going with this. Since then, a the supply chains have been so well connected globally that a product made in a sweatshop in Bangladesh can be delivered without a charger in US, or India.
The point is if products are global, why not investments, right?
The main advantage of this is that products don’t have geography as a demographic in terms of target market. So while you can anticipate a local demand for a product, you can invest to benefit from that value addition from the parent company itself. (Before you promptly point to the fact that a local increase or decrease in demand does not mean much for an MNC with a ton of different markets, I will point to the fact that demand patterns repeat themselves over similar demographics)
How to Invest in US Stocks?
You can two that in one of many(two) ways:
1. Open an Account with a Broker
There are mainly two kinds of brokers in this definition, Indian brokers who allow global trading through international subsidiaries, and global brokers who offer select markets like US/Hong Kong or US/UK. The charges on both differ, and so do their offerings, sometimes. Mainly, we’re talking currencies, equity, debt, futures and options.
No to miss out, Foreign Stock Brokers in India
One limitation of this is, well investment limit. Because either way, you will have to remit money to an international brokerage entity, it will be covered under Liberalised Remittance Scheme, the cap for that is $ 250,000 per year per person.
2. Mutual Funds
The second and probably a much easier way to do that is by investing in mutual funds and buying units of such funds that invest that money in such international markets. First, this saves a ton of time spent after research, which might be essential to you unless you’re a finance professional. Second, these managers do kind of know it better, it being their job and all. Third, you don’t have to go through the trouble of remitting money and stuff, and they don’t have an investment cap. Keep in mind, however, that these funds do charge higher for all that.
Tax and Stuff
First things first, both of those ways would be taxed as capital gains in terms of income received due to buying and selling transaction. So you have the usual capital gains stuff according to duration, if it’s less than 24 months its short-term tax and more is long term. Because India is a part of Double Taxation Avoidance Agreement (DTAA), it’ll be only taxed once in India. That also means that any dividends received that would automatically be taxed in US are qualified for Foreign Tax Credit.
How Much Should You Invest in US Stocks?
Well you certainly have an upper limit there in one of the scenarios, but getting to how much you should invest, a good thing to keep in mind is that when you select international brands, they’ll usually be MNCs so they’re much more likely to be large cap stocks. This means your expenses kind of go up, because your parking period has increased.
What all of that mumbo jumbo means is that you’ll only get an adequate return if you’re willing to hold the investment for long term, unless they’re huge scale short term gains, which is rare in any market. The usual strategy is to invest incrementally to get the same value over a period of time, and account for your needs with that money, and invest accordingly.
I do want to ask though, do you think there is an absolute answer to this “How much should I invest?” “Like 10.” I mean how much is usually according to your variables, and a good idea is to account the ones that affect the investment strategy the most. Anyway, comment your thoughts on this below!
The Bottom Line
International markets are like any other markets, which obey the rules of their sector and market behaviour. So keep in mind this is not exactly uncharted territory, if you’re new. Also keep in mind that they also kind are. And, of course there are many easy ways to invest or trade in international stock market from India. You simply have to find the right approach.