The Lucrative US Share Market
If you’re a fan of Shark Tank, you know who Kevin O’Leary is. And you probably also know that he said if we stop buying coffee every day for 40 years, we could buy a house from the money we’ve saved. On similar lines, Australian Real Estate Agent Tim Gurner asked millennials to “stop wasting money on avocado toast” and put it in a deposit instead.
Such reality checks by millionaires have gotten a lot of people thinking about investing, and different ways of doing it. “How to increase your return on investments” or “How to diversify your portfolio” seem to be topics trending on every social media platform these days. The emergence of multiple YouTube channels solely dedicated to helping one make decisions as an investor is proof of the fact that investors are intently and zealously looking for newer and better places to put their money in.
Indian share market is home ground. Since we are still a developing economy, the share market is a playground for small and big companies, 50-year-old and 5-year-old companies. But like everything under the sun, the Indian market has its risks. The ever-increasing number of NPAs, the twin balance sheet problem has investors looking around for better avenues. Instead of looking at gold or real estate, which seem to be a low-risk and safe haven for most, there is one place that the investor could look into – The US share market!
Why should I invest in the US share market?
Paying heed to Warren Buffet’s warning to “never invest in a business you cannot understand”, let’s take a peek into what the US share market holds in store.
First off – the currency. The USD happens to be a ‘hard currency’, i.e, it is a currency that is not going to see a lot of ups and downs and will be relatively stable. The INR, on the other hand, has not seen a lot many good days in the past couple of years. This implies that the value of the investment made in the US stock market will remain stable, and possibly high, while the value of a stock in the Indian market could go low. This also leads to increased volatility in the Indian market when compared to the US market. The Dow Jones index has consistently outperformed the BSE Sensex in the past 8-10 years.
The US market is very startup-friendly. There are over 500 unicorns in the world right now, with over 50% in the US alone! The US makes for a great playing field for them as it allows the startups to pool money from the public in their initial years instead of diverting their profits, and the startups take the investors along with it in their journey of growth. Companies like Tesla are a result of the US market allowing startups to get listed with minimal requirements. So naturally, when you have a hand in a company going big, your share value will also shoot up
The US market has the advantage of listing a lot of global companies. The biggest name that will catch your eye is Apple. Who doesn’t want a bite of that apple! Other companies that will pull you towards the US market are Microsoft, Facebook, Amazon, Google, Netflix, and even Bumble!
How do I invest in the US share market?
There are multiple ways in which one can invest in the US.
There are quite a few online portals, like Vested and Winvesta that let you invest directly in US stocks. They are secure stock trading platforms that are legal and follow the government’s guidelines. They allow fractional ownership of US stocks as well, which means, multiple investors can come together to buy one unit of stock. This attribute makes it very economical and beneficial to a middle-income investor who is just dipping his toes into the US market.
The investor needs to open an ‘overseas trading account’ with the portal by providing proof of ID and address -a PAN Card and an Aadhaar card (having a PAN card is mandatory under Liberalized Remittance Scheme or LRS). The account opening process is entirely online, fairly seamless, and takes only a matter of minutes. The funding to the account, however, must happen in USD and not INR. So the investor’s funds need to be transferred from his account in India to the portal’s partner bank located in the US. The bank account in India should have been maintained by the investor for a minimum period of 1 year, and a bank statement should be provided to legitimize the source of funds. The upper limit of such a transfer is capped at $250,000 USD per year. The only drawback is that the fluctuations in the exchange rate can cost the investor more than anticipated.
Shares in companies involved in the IT sector are fail-proof at this point in time. Green Energy and Electric Automotives are potential gold mines due to an increase in climate change awareness. COVID has also shown that the pharma sector will remain ever-important.
An alternate method of investment is by investing in Mutual Funds or Exchange Traded Funds (ETFs).ETFs have particularly gained a lot of importance as passive investments.
Mutual funds are considered the easiest way to invest overseas and are also beginner-friendly. An overseas trading account is not needed. If the investor is not confident in his abilities to analyse stocks and choose the right ones, mutual funds are a safe bet. Diversification is the biggest reason why a Mutual Fund is favourable.
You may invest in a mutual fund that has stocks of US companies, like Aditya Birla Sun Life International Equity Fund, PGIM India Global Equity fund, ICICI Prudential US Bluechip Equity Fund. A possible disadvantage is a high fee charged to manage the funds which can come up to roughly 3%. Or you could invest in ‘Fund of Funds’ that are managed by Asset Management companies. An FoF invests in mutual funds overseas, rather than investing in the stock directly. This is considered an attractive option for small-time investors.
ETFs offer similar advantages to mutual funds like diversification. The only difference is that an ETF can be traded like a regular stock.S&P 500, Dow Jones Industrial average are some popular indexed-ETFs.Some intermediaries that let you invest in ETFs are Vested, ICICI securities, HDFC securities. So if you already bank with Axis Bank, ICICI, HDFC, you can make use of their securities services with ease.
You can also look for an ETF based on industry or investing style. Thematic ETFs, as the name suggests, follow themes. The US boasts around 150 thematics ETFs. For example, Amplify Thematic All-Stars ETF (MVPS) holds some of the “hottest” stocks like Tesla, Microsoft, Paypal, Alphabet and a few more. These ETFs are however a bit more expensive than indexed ETFs.
Another fascinating thematic ETF in the market is the ARK Innovation ETF (ARKK). This fund invests in cutting edge and inventive technologies like Green Energy, Genomics and Proteomics, and Fintech.
What are the regulations and requirements as per FEMA, 1999?
‘Form A2’ and ‘Application cum Declaration’ forms under FEMA, 1999 are required to be submitted before remitting.
As mentioned before, a PAN card is a must!
Under the Liberalised Remittance Scheme, remission of up to $250,000 is allowed per financial year to all residents, including minors. The quota is inclusive of securities, real estate, and bank deposits. This limit is subject to revision according to macroeconomic conditions.
If remission is done by minors, LRS (Form A2) declaration needs to be countersigned by the minor’s guardian.
NRIs cannot remit under LRS.
LRS is applicable only to individuals and not to corporates, partnerships, trusts, HUF.
What are the tax considerations I must keep in mind?
For-profits you make from selling your stocks, a Long-Term Capital Gains tax of 20% is applicable in India (NOT in the US) if you have held the investment for more than 24 months. Along with health and education cess, it comes around to 25%. If you have held it for less than 24 months, then you will be taxed according to your income tax slab.
If you have received dividends, then you will be taxed at a flat rate of 25% in the US (NOT in India). The good news here is that you will not be taxed in India again due to the Double Taxation Avoidance Agreement between India and the US. Proof of the tax you have paid will be made available to you as Foreign Tax Credit which can be used against your tax liability.
Diversifying your stock portfolio, not just across instruments but also across borders can help in cushioning blows and leveraging various economic and financial scenarios across the globe to your benefit. Although it may take time to find the perfect stocks and funds suitable to one’s risk appetite and requirements in terms of returns, it needs to take a step to make progress. The post-lockdown business environment is seeing a lot of economic recoveries and is a great time to let your money see the world.