The US stock markets have been on a roll in the last decade or so.
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A few stocks have done even better than broad indices, specifically in the technology sector:
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The rally in US markets has exceeded the performance of global stock markets for the entire last decade:
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Investors who either want to participate in the bull market or diversify their holdings beyond India may consider investing in US markets. Read more: Should you invest in international stocks?
Where to invest?
There are two broad ways you can invest in US markets via mutual funds/ETF or individual stocks.
There are multiple mutual funds in India that invest directly or indirectly in the US stock market. A portal like Valueresearchonline will provide a list.
The other way is remitting money from India to the US and purchasing stocks/ETF/MFs directly. RBI has a scheme called Liberalized Remittance Scheme (LRS). You can send out up to $250,000 (approximately ₹188 lakhs, $1=₹75) per year to invest in foreign investments. We will examine both of these options in detail below. LRS does not allow speculation and trades in derivatives.
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Option 1. International mutual funds
These funds have been around since the mid-2000s, though their popularity has increased only recently once the US bull-market started. These funds behave like any other mutual fund in India. You can have lump sum and SIP investments like every other fund. These funds not just invest in US stocks but there are country-specific (Japan, Taiwan, China), regions (Europe, Asia, Emerging Markets) and themes (Technology, Agriculture, Energy) etc.
These funds either hold foreign stocks directly by buying them from foreign exchanges or invest in already existing funds that are domiciled in other countries. The second option is called the feeder fund route.
Feeder funds may or may not pass on the underlying fund’s expenses to the Indian investor. SEBI regulations restrict the total expense ratio that AMCs can charge in these situations.
The taxation of International mutual funds is the same as that of debt funds. Short term (<3 years) capital gains are taxed at the slab rate, and long term (>3 years) gains are taxed at 20% post-indexation. Taxation is covered in more detail in this post: How is tax calculated on selling shares/MFs?
How to choose an International fund?
choose broad market funds like the total US market based on indices like the S&P 500 or Russel 3000. You should prefer index funds over active funds
avoid niche funds like specific country, sector and thematic funds to be more diversified. US-based funds (like S&P500) are somewhat an exception to this rule given the 65%+ weightage of US stocks in global stock market indices
technology-focused funds like those based on the Nasdaq-100 have given high returns in the recent past, but that implies high risk for investors who do not understand the concept of market cycles
Using the Liberalized Remittance Scheme (LRS), you can remit up to $250,000, a bit less than 2 crores, a year to invest in foreign stocks as well as other purposes like foreign education and travel abroad.
Investing under LRS involves opening an account with a global broker like Charles Schwab or Interactive Brokers and buying any supported stock or ETF by remitting money. Alternatively, some Indian brokers and startups have tie-ups with foreign brokers that offer access to US markets.
LRS gives the most flexibility and options to the investor since most US stocks and ETFs are available, unlike the restricted options available under International funds
Under the route, the Indian investor has to consider a few things.
Impact of estate taxes
If an investor owning US assets like stocks, mutual funds and ETFs dies then the US IRS requires payment of up to 40% of the asset market value in taxes, as long as the asset value, at the time of death, exceeds $60,000.
Imagine you are a resident Indian investor who has some investments of market value $100,000 (₹75 lakhs) in US stocks and ETFs that you made under LRS. This $100,000 is the market value and not what you invested. If you die today, your nominee or heirs will get $100,000 less the estate tax which could go to as high as 40%. For no fault of yours, except that you died and had more than $60,000 in US assets, the IRS will take a large chunk of your portfolio.
Remittance costs can eat into returns considerably, as the figure shows below. Unless the ticket size is multiple lakhs, the investor will lose quite a bit in charges for each buying and selling leg. If the investor is considering a SIP of ₹100,000/month or less, then International funds are better.
A detailed write-up on taxation and compliance requirements for US market investing is outside the scope of this article. Therefore, investors are advised to refer to these two sources and confer with a tax-consultant/CA before investing:
FX charges, brokerage, minimum balances, TER of funds
Taxation
Same as Indian MF
Complex; CA consultation recommended; Estate tax
SIP amount
Any
Should be high due to FX charges
Our recommendation will be to choose International mutual funds for investors looking for investment in US stock markets. Nowadays, index funds are available compared to only active funds earlier. Index funds are well suited to the hands-off investing style recommended in this blog. Investors should always consult with their financial advisor before investing in any security.
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This post titled What is the best way to invest in US stocks? first appeared on 12 Dec 2021 at https://arthgyaan.com
