Investing In Us Ipos: A Guide For Indians

Investing in the US stock market from India can be a great way to diversify your portfolio and gain exposure to some of the world's most popular stocks, like Facebook, Google, Apple, and Tesla. There are two main ways to do this: direct investment in stocks and indirect investment via mutual funds or ETFs. Before investing, it is important to understand the costs and restrictions involved, such as brokerage and currency conversion fees, as well as the annual remittance limits set by the Reserve Bank of India. Additionally, Indian investors should be mindful of the different tax regulations and requirements in the US and India, as well as the impact of currency exchange rate fluctuations on their investment returns.

Direct investment in stocks

Opening an Overseas Trading Account with a Domestic Broker

Many domestic brokers in India have tie-ups with stockbrokers in the US and act as intermediaries to execute trades. To open an account with such a broker, you may need to submit a set of documents, and there may be restrictions on certain investment vehicles or the number of trades you can make. It is important to be mindful of the costs, including brokerage and currency conversion charges, before choosing a broker.

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, such as Charles Schwab, Ameritrade, or Interactive Brokers. As with domestic brokers, it is essential to understand the fees and charges associated with these accounts before opening one.

Things to Consider

When considering direct investment in US stocks from India, it is important to keep in mind that international investing attracts more charges than domestic investments. Account charges, brokerage, and currency conversion fees can add up, so it is crucial to understand all costs involved. Additionally, investing is generally more cost-efficient than trading due to the high charges involved in the latter. Long-term investing allows for reasonable returns even after incurring charges.

It is also important to consider applicable taxes in both the US and India. For example, dividends are taxed at a rate of 25% for Indian citizens in the US, but the Double Tax Avoidance Agreement (DTAA) allows investors to claim credit for taxes paid abroad.

Finally, starting small and increasing your investment as you gain a better understanding of the US markets is a prudent approach.

Indirect investment in stocks via mutual funds or ETFs

If you want to avoid the hassle of opening an overseas trading account, you can opt for indirect investment in US stocks through mutual funds or exchange-traded funds (ETFs). This method provides diversification without the need for individual stock selection.

Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. You can buy shares of a mutual fund that focuses on US stocks, providing diversified exposure to the US market. These funds are managed by professionals, making them suitable for those who prefer a hands-off approach.

ETFs are investment funds traded on stock exchanges, similar to individual stocks. They typically track an index, commodity, bonds, or a basket of assets. US stock ETFs allow investors to gain exposure to the US stock market as a whole or specific sectors. You can purchase US ETFs directly via a domestic or international broker or buy an Indian ETF of international indices.

Many Indian mutual fund houses offer ETFs that track US indices like the S&P 500, enabling you to invest in the overall US stock market without picking individual stocks. There are also international mutual funds available in India that focus on US markets.

Investing in ETFs or mutual funds provides diversification and reduces the risk associated with individual stock volatility. Additionally, you may not need to open an overseas trading account or maintain a minimum deposit, which is often required by stockbrokers offering direct international investments.

Opening an overseas trading account with a domestic broker

There are several Indian platforms that allow you to invest in US stocks from India, as there are no US stockbrokers in the country. Many domestic brokers have tie-ups with stockbrokers in the US and act as intermediaries to execute your trades. You can open an overseas trading account with any such broker, but you may have to submit a set of documents to open the account.

It is important to remember that this facility may have some restrictions. Depending on the brokerage firm, you might have some restrictions on certain investment vehicles or the number of trades you can make, etc. The cost of investing can also be high, considering brokerage and currency conversion charges. Hence, ensure that you know all the costs before opening an account.

• ICICI Direct
• HDFC Securities
• Kotak Securities
• Axis Securities

Investing through instruments

If you don't want to open an overseas trading account, you can invest indirectly in the shares of US companies through international mutual funds and exchange-traded funds (ETFs). This allows you to invest in the US stock market without being directly exposed to its volatility. You can also invest in domestic funds that invest in the US stock market.

Opening an overseas trading account with a foreign broker

To open an overseas trading account with a foreign broker, you will need to follow a few key steps. Firstly, it is important to research and compare different foreign brokers to find one that suits your needs. Factors to consider include the fees and charges associated with the account, the range of US stocks available for trading, and the level of customer service provided. Once you have selected a broker, you will need to complete an account application and provide any required documentation, such as proof of identity and address. In some cases, you may also need to submit to a know-your-customer (KYC) process. After your account has been approved, you will need to fund it by transferring funds from your Indian bank account or through a wire transfer from a non-Indian bank account. It is important to be mindful of any fees that may be incurred during the funding process.

When choosing a foreign broker and opening an overseas trading account, it is crucial to be aware of the regulatory requirements and restrictions that may apply. For example, under the Liberalized Remittance Scheme (LRS) guidelines, Indian residents are restricted from remitting funds for trading in the US stock market or any foreign market. Additionally, there may be specific reporting requirements and tax implications associated with overseas investments, so it is essential to consult with a tax expert to ensure compliance with the laws of both the US and India.

By opening an overseas trading account with a foreign broker, you can gain access to a wider range of US stocks and benefit from more comprehensive trading platforms and research tools. However, it is important to carefully consider the fees and charges associated with such accounts, as well as understand the risks involved in international investing.

Understanding the charges involved

Brokerage Charges

Brokerage charges vary depending on the entity, with some brokers charging a fixed fee per trade, while others charge a percentage of the total trade or total asset value. These fees can add up, especially when combined with other potential fees such as international wire fees or FX conversion fees charged by your bank.

Taxes on Investment Gains

While there are no capital gains taxes on your investments in the US, you are liable to pay taxes on any capital gains in India. The amount of tax depends on how long you hold the investment. For holdings of more than 24 months, the long-term capital gains tax rate is 20% with indexation benefits. If you sell a stock within 24 months, it is considered a short-term capital gain and is taxed according to your income tax slab.

Taxation on Dividend

Dividends are taxed differently than capital gains. In the US, dividends are taxed at a flat rate of 25% for Indian citizens. However, thanks to the Double Taxation Avoidance Agreement (DTAA) between the US and India, you can offset this tax by claiming it as a Foreign Tax Credit when filing your income tax in India.

Bank Charges

Bank charges can include foreign exchange conversion fees, transfer charges, and possibly a one-time account set-up charge, depending on your bank. These fees can vary, so it is important to understand the specific charges levied by your bank.

Foreign Exchange (FE) Rate

The FE rate, or the cost of converting Indian currency to US dollars, can significantly impact your investment. Not only does it determine the number of units allotted to you when purchasing shares, but it also affects your profits. A less favourable exchange rate can result in lower returns on your investment.

Account Opening Fees

Some platforms may charge account opening fees, which can vary depending on the platform and the features included. For example, HDFC Securities offers multiple plans with different account opening fees, ranging from ₹0 to ₹250 per month.

Other Charges

In addition to the charges mentioned above, there may be other fees associated with investing in US stocks from India. These could include charges for extended hours trading, priority customer support, or other optional services provided by the platform. It is important to carefully review the fee structure of the platform you choose to ensure you are aware of all potential charges.

Frequently asked questions