A Beginner's Guide To Investing In Us Equities

Investing in US equity is an appealing prospect for many Indian investors. The US stock market is home to some of the world's most popular stocks, like Facebook, Google, Apple, and Microsoft. Investing in US stocks allows Indian investors to diversify their portfolios, tap into the thriving US market, and access a diverse range of companies across various industries. There are two main ways to invest in US equity from India: direct investment in stocks and indirect investment via mutual funds or ETFs. Direct investment involves opening an overseas trading account with a domestic or foreign broker, while indirect investment can be done through mutual funds that invest in international stocks or ETFs. It's important to consider the costs, restrictions, and regulatory requirements associated with each option before making a decision.

Direct investment in stocks

Opening an Overseas Trading Account with a Domestic Broker

Many domestic brokers have tie-ups with stockbrokers in the US. They act as intermediaries and execute your trades. You can open an overseas trading account with any such broker. You might have to submit a set of documents to open this account. However, this facility usually has some restrictions. Based on the brokerage firm, you might have some restrictions on certain investment vehicles or the number of trades that you can make. The cost of investing can be high, considering brokerage and currency conversion charges. Hence, ensure that you know all the costs before opening an account.

Opening an Overseas Trading Account with a Foreign Broker

You can also open an overseas trading account directly with a foreign broker with a presence in India. Some such brokerages are Charles Schwab, Ameritrade, and Interactive Brokers. Ensure that you understand the fees and charges before opening the account. Conduct your research properly before you pick the best broker to invest in US stocks.

Direct Stock Plans

Many companies allow you to buy or sell shares directly through a direct stock plan (DSP). You can also have the cash dividends you receive from the company automatically reinvested into more shares through a dividend reinvestment plan (DRIP). Direct stock plans allow you to purchase or sell stock directly from the company, eliminating the need to use or pay commissions to a broker. However, you may have to pay a fee for using the plan's services. Make sure to read the company’s disclosure documents before you enrol. Some companies require that you already own stock in the company or are employed by the company before you may participate in their direct stock plans. You may be able to buy stock by investing a specific dollar amount rather than having to pay for an entire share. Some plans require a minimum amount of investment or require you to maintain specific minimums in your account. DSPs usually will not allow you to buy or sell your securities at a specific market price or at a specific time. Rather, the company will purchase or sell shares for the plan at established times and at an average market price. Depending on the plan, you may be able to have your shares transferred to your broker to have them sold, but the plan may charge you a fee to do so.

Indirect investment in stocks via mutual funds or ETFs

Investing in US stocks via mutual funds or ETFs is a popular choice for those who want to gain exposure to the US market without the hassle of direct investment. Here's a detailed guide on how to get started with indirect investment in US stocks:

Mutual Funds

Mutual funds are a type of investment vehicle that pools money from multiple investors to purchase a diversified portfolio of stocks, bonds, and other securities. When you invest in US stocks through mutual funds, you can choose between two main types:

• Fund of Funds: These are local mutual funds that invest in international mutual funds. They tend to have higher expense ratios since they involve fees for both the Indian fund and the underlying international fund.
• Local Mutual Funds: These are Indian mutual funds that invest directly in international stocks. While they may have lower fees compared to Fund of Funds, they still typically have higher expense ratios than investing directly in US stocks.

When choosing a mutual fund, be sure to consider the fund's investment objectives, risk profile, and fees. Keep in mind that mutual funds are typically actively managed, which can result in higher fees. Also, remember that there may be regulatory restrictions on the amount of money Indian mutual funds can invest in international markets.

Exchange-Traded Funds (ETFs)

ETFs are similar to mutual funds in that they are a collection of multiple stocks, but they are traded on exchanges like stocks, offering more flexibility in buying and selling. When investing in US stocks through ETFs, you have two main options:

• Direct Route: You can purchase US-based ETFs directly through a domestic or international broker.
• Indirect Route: Alternatively, you can invest in Indian ETFs that track international indices, providing exposure to US stocks.

ETFs offer several advantages, including lower costs, tax efficiency, and intra-day liquidity. They are usually passively managed, tracking a market index or sector sub-index, which results in lower fees compared to actively managed mutual funds. However, keep in mind that ETFs may have regulatory restrictions on investment amounts, similar to mutual funds.

Benefits of Indirect Investment

Indirect investment in US stocks via mutual funds or ETFs offers several advantages:

• Diversification: You can spread your investments across a range of US stocks, reducing the risk associated with investing in individual companies.
• Expert Management: Mutual funds and ETFs are managed by professionals who make investment decisions on your behalf, allowing you to benefit from their expertise.
• Accessibility: Indirect investment options often have lower minimum investment requirements, making them more accessible to a broader range of investors.
• Lower Costs: ETFs, in particular, tend to have lower fees and transaction costs compared to other investment options.
• Liquidity: Mutual funds and ETFs provide flexibility in buying and selling, allowing you to enter and exit investments more easily.

Things to Consider

While indirect investment in US stocks has its benefits, there are also a few things to keep in mind:

• Limited Control: You may have less direct control over the specific stocks you invest in, as the fund manager makes the investment decisions.
• Fees and Expenses: Mutual funds and ETFs often come with various fees, such as management fees, which can impact your overall returns.
• Market Risk: Indirect investments are still subject to market volatility, and there is no guarantee of positive returns.
• Customization: You may not be able to customize your investments to meet your specific needs, as they are subject to the fund's overall investment strategy.

In conclusion, indirect investment in US stocks via mutual funds or ETFs can be a great option for those looking for diversification, expert management, and accessibility. However, be sure to carefully consider the fees, regulatory restrictions, and potential risks associated with these investment options before making any decisions.

Currency risk

For example, if the US stock market remains stable but the US dollar weakens against your home currency, the value of your US equities will decrease when converted into your home currency. On the other hand, if the US dollar strengthens against your home currency, the value of your US equities will increase when converted. These fluctuations can either enhance or reduce the returns on your US equity investments, demonstrating the impact of currency risk.

To minimise currency risk, investors can consider hedging their investments. Hedging involves taking on one risk to offset another. In the context of currency risk, investors can use currency futures or currency hedging products to lock in exchange rates and protect themselves from unfavourable fluctuations. Additionally, diversifying your investments across different currencies can also help mitigate currency risk, as certain currencies, like the US dollar, exhibit a negative correlation with global equity prices.

It's important to note that currency risk is just one aspect of investing in US equities, and there are also other risks and considerations to keep in mind, such as political risk and local tax implications. Conducting thorough research and understanding the potential risks involved will help you make more informed investment decisions.

Taxation complexity

In the US, dividends are taxed at a rate of 25% for Indian citizens. There is no capital gains tax in the US, but one is liable to pay taxes on the capital gains in India. If stocks are held for more than 24 months, profits are treated as long-term capital gains and taxed at a rate of 12.5% without indexation in India. If stocks are sold before two years, they are considered short-term capital gains and are taxed according to the individual's income tax slab in India.

It is important to note that the exemption of Rs. 1 lakh per year available for long-term capital gains on stocks does not apply to foreign stocks. Additionally, investors need to be mindful of the Liberalized Remittance Scheme (LRS) guidelines set by the Reserve Bank of India (RBI), which permits an Indian resident to invest up to $250,000 per year without any special permissions.

Regulatory and compliance issues

• Regulatory Activity: There has been a steady increase in regulatory activity across industries, and financial regulatory activity is taking up more space on corporate calendars. This includes enforcement actions, examinations, and rule-making by agencies such as the US Securities and Exchange Commission (SEC). It is crucial for investors to stay informed about these activities and their potential impact on their investments.
• Legislative and Regulatory Changes: Understanding the difference between legislation and regulation is essential. Legislation refers to the introduction of a bill, while regulation involves agencies deciding how the bill will be enacted. Investors should monitor legislative changes and anticipate how they may be regulated to make informed investment decisions.
• Compliance Risk Management: Investment firms need to adopt a proactive approach to compliance risk management. This includes creating a framework for risk assessment, tracking and measuring risks, and allocating resources accordingly. A well-structured Regulatory Assessment and Response Execution (RARE) team can help identify and address regulatory changes effectively.
• Due Diligence: Conducting thorough due diligence is crucial before making any acquisitions. This includes legal, financial, and operational due diligence to identify potential risks and ensure compliance with relevant laws and regulations. The scope and depth of due diligence can vary depending on the size and complexity of the investment.
• Antitrust and Competition Laws: Investors should be aware of antitrust laws and their impact on mergers and acquisitions. The Hart-Scott-Rodino Act (HSR) sets thresholds for reportability, and acquisitions above certain thresholds require filings and a waiting period before closing. Additionally, the Clayton Act prohibits individuals from serving as officers or directors of competing corporations, which may have implications for private equity investors.
• Foreign Investment Regulations: The Committee on Foreign Investment in the United States (CFIUS) has increased scrutiny on transactions involving non-US investors and US businesses, particularly in sensitive industries such as technology and defense. Recent regulatory reforms have expanded CFIUS's powers and mandated submissions for certain types of transactions. Investors should carefully consider these regulations when dealing with cross-border investments.
• Data Privacy and Cybersecurity: With the increasing focus on data privacy and cybersecurity, investors need to conduct comprehensive due diligence on the data-handling practices of their target companies. This includes assessing compliance with regulations such as the California Consumer Privacy Act (CCPA) and the General Data Protection Regulation (GDPR).
• Anti-Bribery and Anti-Corruption Laws: Investors must evaluate the target company's compliance with anti-bribery and anti-corruption legislation, such as the Foreign Corrupt Practices Act (FCPA). This is especially important if the company conducts business in high-risk regions or industries.

Frequently asked questions