A Guide To Investing In The Nasdaq Index From India

Investing in the Nasdaq stock exchange is an attractive prospect for Indian investors looking to expand their market exposure and access some of the world's most dynamic and innovative companies. The Nasdaq, which stands for the National Association of Securities Dealers Automated Quotations, is a global electronic marketplace that facilitates the buying and selling of securities. It is home to over 3,300 companies, including tech giants such as Apple, Microsoft, and Amazon. For Indian residents, investing in the Nasdaq is made possible through the Reserve Bank of India's Liberalized Remittance Scheme (LRS), which allows individuals to invest in foreign markets. This guide will explore the steps and considerations for Indians interested in investing in the Nasdaq index, including the different investment options, legal requirements, and potential risks.

Direct investment: Open an overseas trading account with a domestic or foreign broker to directly buy stocks listed on the NASDAQ indices

If you're based in India and are interested in investing in stocks listed on the NASDAQ indices, you can do so by opening an overseas trading account with a domestic or foreign broker. Here's a detailed guide on how to go about it:

Understanding the Legal Requirements:

Before investing in NASDAQ stocks from India, it's important to understand the legal framework. The Reserve Bank of India's (RBI) Liberalized Remittance Scheme (LRS) allows Indian residents to invest in foreign markets, including NASDAQ. The LRS permits individuals to remit funds for various purposes, including investments abroad. The current annual limit under the LRS is INR 20,941,426.06 (USD 250,000), which provides a substantial opportunity for diversification. To take advantage of the LRS, you must have an active Indian bank account, a valid Permanent Account Number (PAN), and a passport.

Choosing a Broker:

The next step is to select a reliable international broker that suits your needs. You have two main options: domestic brokers with partnerships with U.S. stockbrokers or foreign brokers with a presence in India. Some popular domestic brokers include ICICI Direct, HDFC Securities, Kotak Securities, and Axis Securities. On the other hand, examples of foreign brokers operating in India are Charles Schwab, Ameritrade, and Interactive Brokers. When choosing a broker, carefully consider their fees, services offered, research capabilities, and customer support.

Opening a Trading Account:

Once you've selected your broker, it's time to open a trading account. This typically involves submitting various documents, such as identity proof, address proof, tax ID proof, and bank statements. Some brokers offer a digital KYC process, making it quick and convenient. After setting up the account, you'll need to fund it, and many brokers provide digital and cost-effective funding methods. Remember that Indian residents can invest up to the annual limit specified by the LRS.

Selecting and Purchasing NASDAQ Stocks or ETFs:

With your funded account, you can now explore NASDAQ investment opportunities. You have the option to invest in individual NASDAQ-listed stocks or opt for Exchange-Traded Funds (ETFs) that track the NASDAQ index. Popular NASDAQ-listed companies include tech giants like Apple, Microsoft, Amazon, and Alphabet. Investments can start with as little as INR 0.84 (1 cent). When investing, be mindful of currency exchange rates and taxes on capital gains. Additionally, some platforms may have restrictions on certain investment vehicles or the number of trades allowed.

Understanding Tax Implications:

When investing in NASDAQ stocks from India, it's crucial to be aware of the tax implications. Dividends from US stocks are subject to a flat 25% tax in the US, and the remaining amount is taxable in India according to your income tax slab. While there is no capital gains tax in the US for foreign investors, any gains are taxable in India. Long-term capital gains (investments held for over 24 months) are taxed at 20%, while short-term gains are added to your taxable income. Fortunately, India and the US have a Double Taxation Avoidance Agreement (DTAA), which allows you to offset taxes paid in the US against your Indian tax liability. Additionally, as of July 1, 2023, all remittances under LRS are subject to Tax Collected at Source (TCS), regardless of their origin.

Compliance with KYC Requirements:

When investing in NASDAQ stocks, Indian residents must comply with Know Your Customer (KYC) requirements. This involves providing necessary documentation to the Authorized Dealer (AD) bank through which remittances are made. New customers may be subject to additional due diligence for capital account remittances.

By following these steps, you can directly invest in NASDAQ-listed stocks from India, gaining access to some of the world's most dynamic and innovative companies. Remember to stay informed about the market, consider your financial goals, and always make investment decisions wisely.

Indirect investment: Invest in mutual funds or ETFs that track the NASDAQ index

Indirect Investment: Mutual Funds or ETFs Tracking the NASDAQ Index

If you want to invest in the NASDAQ index from India without directly purchasing stocks, you can consider investing in mutual funds or exchange-traded funds (ETFs) that track the NASDAQ index. Here are some options to explore:

• Invesco QQQ Trust (QQQ): This is the most popular NASDAQ-100 ETF and combines major tech stocks with a low expense ratio of 0.20%. It includes well-known tech companies like Apple, Microsoft, Amazon, and Meta Platforms.
• Fidelity Nasdaq Composite Index ETF (ONEQ): This ETF provides broader exposure to the NASDAQ by holding more than 1,000 companies, including Apple, Microsoft, Nvidia, and Amazon. It typically invests at least 80% of its assets in common stocks included in the NASDAQ Composite Index.
• Direxion Nasdaq-100 Equal Weighted Index Shares (QQQE): This ETF invests in the NASDAQ-100 but with a twist. It provides equal-weight exposure, meaning it invests 1% of its holdings in all 100 stocks and rebalances quarterly to reset. This reduces the risk associated with being too reliant on any single company.
• Invesco Nasdaq Next Gen 100 ETF (QQQJ): This ETF is based on an index of the largest NASDAQ stocks after the top 100. It includes more mid-cap stocks and has a heavier focus on the information technology and healthcare sectors. With an expense ratio of just 0.15%, it's a cost-effective option.
• Victory Nasdaq-100 Index Fund (USNQX): This mutual fund has been around since 2000 and has strong long-term performance. While it has a higher expense ratio of 0.42%, it still falls below the average for its category. It holds similar stocks to the QQQ ETF.
• Invesco ESG Nasdaq 100 ETF (QQMG): This ETF invests in NASDAQ-100 stocks that meet specific environmental, social, and governance (ESG) criteria. It has a stronger focus on the technology sector, with 61% of its assets in this area.
• Invesco Nasdaq 100 ETF (QQQM): This is a cheaper alternative to the Invesco QQQ Trust, with an expense ratio of 0.15%. It was launched in 2020 and may be more suitable for long-term investors who don't plan to buy and sell frequently.
• Invesco Nasdaq Internet ETF (PNQI): This ETF focuses specifically on internet-related companies, investing at least 90% of its assets in stocks from the NASDAQ CTA Internet Index. It includes companies listed on both the NASDAQ and the New York Stock Exchange.

When considering these options, it's important to evaluate your investment goals, risk tolerance, and the level of diversification you desire. Remember to research and compare the fees, performance, and holdings of each fund before making a decision.

Liberalised Remittance Scheme: Understand the RBI's LRS, which allows Indian investors to remit up to $250,000 per year for investments and expenses

The Liberalised Remittance Scheme (LRS) is a foreign exchange policy initiative introduced by the Reserve Bank of India (RBI) in 2004. The LRS is part of the Foreign Exchange Management Act (FEMA) 1999, which sets out guidelines for outward remittance from India. The scheme was designed to simplify and streamline the process of remitting funds outside of India, overcoming the restrictions imposed by the FEMA.

Under the LRS, Indian residents can remit up to USD 250,000 per financial year for various permissible transactions. This includes both current and capital account transactions, providing individuals with a wide range of financial opportunities. To be eligible, individuals must have an active Indian bank account, a valid Permanent Account Number (PAN), and a passport.

The LRS allows for a variety of transactions, including:

• Purchasing foreign securities, such as stocks listed on the Nasdaq.
• Opening foreign currency accounts with banks outside India.
• Acquiring foreign property.
• Investing in mutual funds and other financial instruments.

The scheme enables Indian investors to diversify their portfolios by providing access to international investment opportunities. It is essential to note that there are certain restrictions on the use of funds under the LRS. For example, remittances cannot be used for margin trading, purchasing lottery tickets, or investing in real estate.

The LRS has specific tax implications. Profits from overseas investments made through the scheme are taxable in India, depending on the holding period of the investment. Long-term capital gains (investments held for over 24 months) are taxed at 20%, while short-term gains are taxed according to the individual's income tax slab. Additionally, a Tax Collected at Source (TCS) of 5% is applicable on remittances exceeding INR 7,00,000.

Geographical diversification: Consider the benefits of investing in global companies and gaining access to companies worldwide through certain ETFs

Investing in global companies and gaining access to companies worldwide through certain ETFs can provide significant benefits in terms of geographical diversification. This strategy allows investors to spread their investments across different geographic regions, reducing overall risk and enhancing returns.

By investing in ETFs that track international indices or include global companies, investors can gain exposure to a wide range of markets and industries. This diversification helps to lower the risk associated with political and economic changes, as well as reduce the impact of external factors such as natural disasters.

For example, if an investor's portfolio is concentrated in a single country, their wealth could be vulnerable to geopolitical upheavals, wars, debt crises, or monetary reforms. On the other hand, a geographically diversified portfolio is more resilient, as losses in one market may be offset by gains in another. This strategy is particularly relevant in today's world, where the rise of China as an economic powerhouse and increasing geopolitical conflicts can have significant impacts on investment portfolios.

ETFs that focus on global companies or international markets can provide an easy and cost-effective way for Indian investors to achieve geographical diversification. By investing in ETFs that track the Nasdaq index, for instance, Indian investors can gain access to some of the world's most dynamic and innovative companies, including tech giants like Apple, Microsoft, and Meta Platforms, Inc.

Overall, geographical diversification through ETFs can help investors preserve and grow their wealth by reducing risk, enhancing returns, and providing access to a broader range of investment opportunities worldwide.

Foreign exchange risk: Be aware of the impact of currency rate fluctuations on your investments when investing in NASDAQ or US markets

Currency exchange rates can have a significant impact on your investments in the NASDAQ or other US markets. Here are some key considerations regarding foreign exchange risk:

Impact on Merchandise Trade

A country's imports and exports are influenced by the strength of its currency. A weaker domestic currency tends to make imports more expensive, while boosting exports by making them more affordable for overseas customers. This dynamic can contribute to a nation's trade deficit or surplus over time. As an investor, be mindful of how currency fluctuations can affect the competitiveness of US exports and imports.

Inflation and Interest Rates

A weak US dollar can contribute to higher inflation in the country, as the cost of imported goods increases. This may prompt the US Federal Reserve to raise interest rates to counter inflation and support the currency. Higher interest rates can impact your borrowing costs, investment returns, and overall economic growth. Conversely, a strong dollar can depress inflation, potentially leading to lower interest rates.

Investment Performance

Currency exchange rates can directly impact your investment portfolio. For instance, a strong US dollar can dampen global demand for commodities, which are often priced in dollars, affecting earnings and valuations for commodity producers. Additionally, a strong dollar can reduce the value of profits earned by US multinationals overseas, potentially impacting their stock prices.

Currency Hedging

Consider hedging your foreign currency risk through various instruments such as currency futures, forwards, options, and exchange-traded funds (ETFs). Currency-hedged ETFs allow investors to take positions in foreign stocks and bonds without bearing the full impact of adverse currency movements.

Currency Volatility

Be mindful of the volatility in currency exchange rates, especially during times of economic or geopolitical turmoil. Sudden and significant currency moves can impact financial markets, as seen during the Asian Financial Crisis and the Japanese yen's gyrations in the early 2010s.

Taxation

When investing in NASDAQ or US markets from India, consider the tax implications of currency exchange rate fluctuations. Dividend taxes, capital gains taxes, and double taxation avoidance agreements between the US and India can impact your overall investment returns.

Frequently asked questions