As the United States is one of the most developed and stable economies of the world, US stocks provide a good investment option, if done discreetly
By Kiran Mohan Mohadikar
It is always said that too much of anything is good for nothing. Though this is not necessarily true in case of savings, one can always use more money or assets. But being invested completely only in one of the options of real estate, fixed deposits, gold, NPS, PF, equity through direct stocks or mutual funds, or debt instruments can be rather risky.
It may so happen that a particular sector may be going through a stagnant phase for a few years especially when you were banking on it to grow to a definite amount in near future. It may so happen that value of a flat or a portfolio of stocks is going down. This scenario has been seen in India after the outbreak of the pandemic. This is precisely the reason why one should look beyond traditional options of real estate, gold and FDs and beyond Indian stocks as well. Among them, the US stocks present a lucrative option to invest.
How to invest in US stocks?
For the first time investor, the route of Indian Mutual Funds is most suited, you can go for US Index Funds or Funds which invest both in Indian and US stocks.
There is an option to invest through various popular Apps like Vested, Indmoney, Groww too. If anything happens to these Apps, your money will be safe as they invest through DriveWealth, LLC that acts as carrying broker for brokerage services provided by Cash App Investing which follows all the relevant US laws.
After gaining experience and growing your capital, you can think of opening a trading account with foreign broker or Indian broker offering facility to invest abroad.
The option to invest in US equities bodes well for NRIs living in USA also as they have NR/E account (Non-resident External) which allows them to keep foreign savings in Indian Rupee helping them take the benefit of rupee depreciation. The NRE/NRO account can be converted to resident account once NRIs come back and settle permanently in India. NRE account offers the facility to repatriate the amount to resident country as well. If you have no plans to return to India, still it makes sense to have a small portion of your portfolio in India for your India specific needs such as taking care of parents, buying real estate in India, and paying student loan taken in India.
- The United States is one of the most developed and stable economies of the world, you will get exposure to technology stocks like FAANG stocks Meta (Facebook), Amazon, Apple, Netflix, and Alphabet (Google).
- Fractional ownership is allowed in the US. For buying one stock of Netflix, you will have to pay around Rs 30,000, but you can buy fraction of the shares worth Rs 100 as well so as to buy other stocks and get exposure to them.
- Benefit of depreciating rupee can also be availed. For example, if you had invested in stocks worth USD 1000 when 1 USD was worth Rs 75 and after a year if you made no returns in your investment but rupee has depreciated to 80 rupees per USD, then you would have made 5/75*100=6.67% gain.
- These stocks are not in your name even though you have invested in them, you do not receive an email with contract note (ownership) from these apps.
- Have to pay fees to the bank for transferring money to your account which can be as much as $6.5 for sending $500.
- Sell Rate (rate at which you buy USD bank) and Buy Rate (rate at which you sell USD to bank) vary too much from the USD-INR rate that we see normally.
- Have to pay fund withdrawal charge as much as $20 if amount is less than $2000 per withdrawal of your money deposited in these apps.
- Have to track happenings in the US such as inflation data, Federal Reserve policy, and US politics.
- Have to declare stocks held or holding as on closing of a financial year. In case you hold foreign assets, you are mandatorily required to file ITR. You have to file a NIL return if income is below taxable limit.
- You do not get the 1 lakh exemption for long term capital gains and 10% tax beyond 1 lakh in LTCG.
- Have to pay 15% STCG if stocks are sold within one year in India.
- There is 25% Tax Collected at Source (TCS) on dividends and to claim the credit, you have to obtain a certificate to avoid double taxation. Fortunately India has DTAA with USA
- If you hold US stocks for more than 24 months, you pay 20% on the gains, if held for less than 24 months, the gains are taxed as per your tax slab plus surcharge and cess.
- Thus higher taxes and non-availability of exemption of 1 lakh impact the returns gained.
- If you plan to invest in excess of Rs 7 lakh a year, 5% TCS will be deducted on amounts in excess to 7 lakh in India for the transfer of funds.
- After all the bank charges, USD procuring charges, app fees for withdrawing etc, the net return will come down and on that you have to pay tax in India.
As a beginner, one may go with a mutual fund which has more than 65% exposure to Indian equities with remaining portion in US stocks, like Parag Parekh Flexi cap fund. Here taxation will be as per equity MF as this scheme never invests more than 35% in US equities giving you enough foreign exposure.
Investing solely in US securities for NRI staying in USA may not give them the exposure a developing economy like India can give. An ideal portfolio must consist of a mix of both domestic and international equities.
Further, there are various legal hurdles owing to Patriots Act, 2001 that a non-US citizen has to jump through before being able to invest in US equities directly, which to a large extent is eased by KYC that is done by Brokers or Asset Management Companies in India.
The whole purpose of saving and investing is to generate an inflation adjusted rate of return of 4-6% to see the real growth of capital. In India the targeted inflation is in the range of 4-6% which is healthy for the economic activity. Thus,10-12% annual growth of capital is ideal to achieve goals like retirement, kid’s education, marriage expenses, vacation, buying a car or any piece of real estate, to name a few.
Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it”. Following this if you invest Rs 15000 every month for 15 years in US stocks and generate 15% returns over the period, you will be able to accumulate a corpus of 1 crore at the end of 15 years. This is 15-15-15 rule. Therefore, saving and investing even a small amount from your first pay cheque and early age is necessary.
(The writer is a Civil Servant of 2014 batch serving with Indian Revenue Service (Customs and Indirect Taxes).
Disclaimer: Views expressed are personal and do not amount to an investment advice, but are meant only for educational purpose