A Guide To Investing In Us Index Funds From India

Investing in US index funds from India is a great way to diversify your portfolio and gain exposure to the US market. Indians can invest in the US stock market through mutual funds, ETFs, and direct or indirect methods. There are two ways to invest in US stocks from India: direct investment in stocks or indirect investment in stocks via mutual funds or ETFs. Direct investment can be done by opening an overseas trading account with a domestic or foreign broker. Indirect investment can be done through mutual funds or ETFs, which can be purchased via a domestic or international broker. When investing in US index funds from India, it is important to consider the associated costs, such as brokerage and currency conversion charges, as well as the applicable taxes in both countries.

Direct investment in stocks

Global Trading Account with Domestic Agent

Many domestic brokers in India work as intermediaries for trades by collaborating with US stockbrokers. You can open an international trading account with any one of these brokers. You might need to submit many documents to open this account. Depending on the brokerage firm, you may be subject to restrictions on the kinds of investments you can utilise or the number of trades you can conduct. 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.

Overseas Trading Account with a Foreign Broker

Another option for setting up a trading account for international markets is to open an account with an international broker that has a presence in India. Be aware of the costs and terms before opening the account. Therefore, conduct your research before selecting the best broker to purchase US stocks from India. Direct investment costs may be high because of brokerage and exchange rate charges. So, make sure you know all the expenses before opening an account.

Fractional Shares

As the price of some stocks can be too high when converted into Indian rupees, you can also buy a fractional share in the US market. A fractional share is a slice of a whole stock and can be traded like a full stock.

Regulatory and Tax Considerations

According to the mandate given by the Reserve Bank of India, all Indian mutual funds registered with the Securities and Exchange Board of India (SEBI) are permitted to invest in international markets up to a limit of $7 billion, and investments in international ETFs have a limit of $1 billion. In Jan 2022, the investments made internationally by these entities almost reached the $7 billion mark, so any fresh investments in international stocks have been paused.

Additionally, the RBI's Liberalised Remittance Scheme (LRS) permits an Indian resident to invest up to $250,000 per year without any special permissions. A 5% TCS (Tax Collected at Source) is levied on all remittances above Rs 7 lakh under the LRS. In the US, dividends are taxed at a rate of 25% for Indian citizens. Owing to the Double Tax Avoidance Agreement (DTAA), the investor can claim credit for taxes paid abroad so that they don’t have to pay tax on the same income twice. There is no capital gains tax on your investments in the US, but you are liable to pay tax on the capital gains in India.

Indirect investment in stocks via mutual funds or ETFs

Indians can invest in the US stock market through indirect methods such as mutual funds and ETFs.

Mutual Funds

International mutual fund programmes offer opportunities for overseas investments. Some of these mutual funds track various indices for different countries in Asia or South America, but most funds track the US market.

An international mutual fund is a scheme that predominantly invests in equity or equity-related instruments of entities listed in the markets of a foreign country. It also invests in debt securities.

US-focused international mutual funds provide the benefit of diversification. However, international diversification can be beneficial in terms of high returns and risky. It is risky when investors do not understand the market, rules, regulations, factors affecting the market and economy, and other geography-specific factors.

International mutual funds are well-suited for investors with a long-term investment horizon and a higher-risk appetite.

Exchange-Traded Funds (ETFs)

Unlike mutual funds, Exchange-Traded Fund (ETF) units are traded on the stock market throughout trading hours. So you can buy and sell ETF units in the exchanges while it is open in the same way that you would buy and sell stocks.

You are eligible to trade ETFs if you have a Demat account with any brokerage house. Many ETFs provide access to NASDAQ and various other important international indices. You can use a domestic or international broker and an Indian ETF of a worldwide index to purchase US ETFs.

There are direct and indirect routes available for ETFs. You can purchase US ETFs directly via a domestic or international broker or purchase an Indian ETF of international indices.

Opening an overseas trading account with a domestic broker

Investing in US index funds from India typically requires opening an overseas trading account with a domestic broker. This process can vary depending on the broker and the specific platform they use, but there are some standard steps and requirements to be aware of.

First, you'll need to find a broker that offers international trading services. Several well-known Indian brokers provide this facility, including Zerodha, ICICI Direct, HDFC Securities, and Kotak Securities. When choosing a broker, consider factors such as their reputation, the range of investment options offered, trading platform features, and associated fees. It's also essential to ensure that the broker is regulated and complies with relevant laws and regulations.

Once you've selected a broker, you'll need to open an account. This typically involves filling out an application form and providing various documents for Know Your Customer (KYC) and Anti-Money Laundering (AML) purposes. The exact documents required may vary but usually include proof of identity, proof of address, PAN card, and bank account details. Some brokers may also require you to complete a W-8BEN form, which certifies your foreign status for US tax purposes. It's important to carefully review the broker's account opening requirements and ensure you have all the necessary documents ready to streamline the process.

After your account is opened, you'll need to fund it before you can start investing. Again, the funding process can vary depending on the broker, but it typically involves transferring funds from your Indian bank account to your brokerage account. Some brokers may offer multiple currency options, allowing you to hold funds in US dollars or other foreign currencies. It's worth noting that there may be fees and charges associated with funding your account, including currency conversion fees, so be sure to understand these before proceeding.

Once your account is funded, you can start investing in US index funds. Your broker may provide real-time trading facilities, allowing you to buy and sell funds during US market hours. Alternatively, they may offer an offline order placement service, where you place orders with the broker, and they execute the trades on your behalf. Either way, you'll be able to access a range of US-based investments, including index funds, exchange-traded funds (ETFs), stocks, and bonds, depending on what your broker offers. Remember to research the specific investment options available through your broker before committing to ensure they align with your financial goals and risk tolerance.

Opening an overseas trading account with a foreign broker

Investing in US index funds from India requires opening an international trading account with a broker that offers access to US markets. This process typically involves several steps, including choosing a reputable broker, completing the account opening process, funding the account, and navigating any regulatory requirements. Here's a detailed guide on how to get started:

The first step is to identify reputable brokers that facilitate international trading for Indian residents. Some well-known brokers that offer this service include Interactive Brokers, Charles Schwab, and Fidelity Investments. These brokers typically have a global presence and provide their clients with access to multiple international markets, including the US. It is important to research their reputation, regulatory compliance, and the range of services they offer.

Once you have shortlisted a few brokers, you can start the account opening process. This usually involves filling out an online application form and providing various documents for verification. The specific documents required may vary depending on the broker, but typically include proof of identity, such as a passport or driver's license, proof of residence, and sometimes additional documentation such as a bank statement or tax forms. It is important to carefully review the broker's requirements and have these documents ready to ensure a smooth application process.

After your account is approved, you will need to fund it in order to start trading. Different brokers may offer different methods for depositing funds, such as wire transfers, checks, or electronic funding. Be sure to review the fees and charges associated with each method, as there may be currency conversion fees or international transfer fees involved. Some brokers may also have minimum deposit requirements, so it is important to consider this when choosing a broker.

When trading US index funds, it's essential to understand the regulatory environment and any restrictions that may apply to Indian residents. For instance, the Reserve Bank of India (RBI) allows residents to invest overseas under the Liberalized Remittance Scheme (LRS). As per this scheme, an individual can remit up to $250,000 per financial year for various purposes, including investments. It is important to stay updated with any changes in regulations and ensure that you comply with them when investing through a foreign broker.

Indirect investment options

There are several indirect investment options for Indians looking to invest in US index funds. Here are some of the most common methods:

Mutual Funds

US-focused international mutual funds or overseas Funds of Funds (FoFs) are a popular way to gain exposure to US index funds. These funds invest in equity or equity-related instruments of entities listed in foreign markets, providing diversification benefits. However, investors should be aware of the risks associated with international mutual funds, including foreign market risk, exchange rate risk, and concentration risk.

Exchange-Traded Funds (ETFs)

ETFs are another option for indirect investment in US index funds. ETFs can be purchased directly via a domestic or international broker, or by purchasing an Indian ETF of international indices. ETFs offer flexibility, as they can be bought and sold on the stock market during trading hours. Additionally, many ETFs provide access to important international indices like NASDAQ.

New-Age Apps

Several startups have launched mobile apps to facilitate Indian investors' access to the US stock market. These apps provide a convenient platform for investing in US index funds. However, due to regulatory requirements, some apps may not allow intraday trading in the US market.

NSE IFSC Exchange

The NSE IFSC Exchange, located in GIFT City, Gujarat, allows Indian retail investors to trade US stocks. Currently, eight US stocks are available for purchase, with plans to expand to 50 US stocks. To trade on this exchange, investors need to open a special Demat account registered with the IFSC and transfer funds from their Indian bank account to the broker's IFSC-registered account.

When considering indirect investment options, it is important to research and understand the associated costs, risks, and regulations. Additionally, keep in mind that international investing attracts more charges compared to domestic investments, including account charges, brokerage fees, and currency conversion charges.

Frequently asked questions