Wall Street Investment Guide For Indians: Getting Started

Investing in Wall Street from India has become an increasingly popular option, with the country's economic promise attracting global investors. India's post-pandemic economic boom has pushed the value of its stock market to about $5 trillion, making it one of the fastest-growing economies in the world. As a result, many investors are looking to take advantage of the country's working-age population and seek to invest in US stocks. There are two main ways to invest in US stocks from India: directly through an overseas trading account with a domestic or foreign broker, or indirectly through mutual funds or ETFs. It is important to be mindful of the various charges and restrictions involved in international investing, such as brokerage and currency conversion fees, as well as the applicable taxes as per US and Indian taxation laws.

Direct investment in stocks

Opening an Overseas Trading Account with a Domestic Broker

Many Indian brokers have tie-ups with stockbrokers in the US and act as intermediaries to execute trades. You can open an overseas trading account with any such broker, but you may have to submit specific documents to open this account. It is important to remember that this method often comes with restrictions, such as limitations on certain investment vehicles or the number of trades you can make. Additionally, the cost of investing can be high due to brokerage and currency conversion charges, so ensure you understand 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, such as Charles Schwab, Ameritrade, or Interactive Brokers. When choosing this option, be sure to research and understand the fees and charges associated with the account.

Things to Remember

When considering direct investment in US stocks from India, keep the following in mind:

• International investing attracts more charges than domestic investments, so be sure to consider all account charges, brokerage fees, and currency conversion costs.
• Investing is generally more cost-efficient than trading in the US market due to the high charges involved in trading. Long-term investing allows you to earn reasonable returns even after incurring these charges.
• Be mindful of applicable taxes according to US and Indian taxation laws. For example, dividends in the US are taxed at a rate of 25% for Indian citizens, but the Double Tax Avoidance Agreement (DTAA) allows investors to claim credit to avoid double taxation.
• Start with a small investment and gradually increase it as you gain a better understanding of the US markets.
• Remember that by investing in foreign markets, you introduce an additional element of diversification to your portfolio.
• Always research and analyse the US market and economy before making any investment decisions.

Indirect investment in stocks via mutual funds or ETFs

An indirect investment in US stocks can be made through mutual funds or Exchange-Traded Funds (ETFs). Mutual funds are actively managed by a fund manager who buys and sells stocks to beat the market and help investors profit. ETFs, on the other hand, are usually passively managed and track a market index or sector sub-index.

Mutual funds have been around for longer than ETFs and typically have higher minimum investment requirements, whereas ETFs can be bought for the cost of a single share. Mutual funds can only be purchased at the end of each trading day, whereas ETFs can be bought and sold like stocks throughout the trading day.

There are two ways to invest in ETFs: directly or indirectly. You can purchase US ETFs directly via a domestic or international broker, or you can purchase an Indian ETF of international indices.

There are many mutual funds that invest in US stocks and/or mutual funds. These include international exchange-traded funds (ETFs) that allow access to Nasdaq and other leading global indices.

The Reserve Bank of India (RBI) released guidelines under the Liberalized Revenue Scheme (LRS) that permit an Indian resident to invest up to $250,000 per year without any special permissions. This limit also applies to overseas portfolio investments (OPI).

It is important to note that international investing attracts more charges compared to domestic investments, so it is essential to understand all the costs involved before investing.

Opening an overseas trading account with a domestic broker

Many domestic Indian 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, it is important to remember that this facility 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, etc.

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.

Some of the domestic brokers with tie-ups with international brokers include ICICI Direct, HDFC Securities, Kotak Securities, and Axis Securities.

Opening an overseas trading account with a foreign broker

You can open an overseas trading account directly with a foreign broker with a presence in India. Some brokerages that offer this service are Charles Schwab, Ameritrade, and Interactive Brokers. Before opening an account, be sure to research the fees and charges associated with each broker.

When opening an overseas trading account with a foreign broker, you may have to submit a set of documents. It is important to be mindful of the charges and restrictions that may be involved. Brokerage and currency conversion charges can be high, so be sure to understand all the costs before opening an account.

In addition to the fees charged by the broker, there are also taxes and other charges to consider when investing in US stocks from India. These include Tax Collected at Source (TCS), capital gains tax, dividend tax, foreign exchange conversion fees, transfer fees, and brokerage fees.

By investing in US stocks, you can participate in the growth of popular companies such as Facebook, Google, Apple, and General Motors, while also diversifying your portfolio beyond the Indian stock market.

International investing attracts more charges

• Higher Transaction Costs: Brokerage commissions for international markets are typically higher than domestic rates. Additionally, there may be extra charges like stamp duties, levies, taxes, clearing fees, and exchange fees. These fees can add up, making international investing more expensive.
• Currency Volatility: Currency exchange rates can fluctuate, impacting the cost of your investment. When investing in foreign markets, you need to exchange your domestic currency for the foreign currency, and vice versa when selling. Changes in exchange rates can affect your returns.
• Additional Fees: Investing internationally may involve one-time account setup charges, foreign exchange conversion fees, transfer fees, and brokerages' buying and selling fees. These fees can vary depending on the broker you choose, so it's important to research and understand the fee structure before opening an account.
• Taxes: Be aware of applicable taxes in both the foreign country and your home country. For example, in the context of investing in US stocks from India, there is a 5% TCS (Tax Collected at Source) levied on remittances above a certain threshold. Additionally, dividends in the US are taxed at a rate of 25% for Indian citizens, and you may need to pay capital gains tax in India.
• Indirect Investments: If you choose to invest indirectly through mutual funds or ETFs, there may be additional costs associated with these investment vehicles. Mutual funds often have management fees, and ETFs may have management expense ratios that include various fees.

To make informed investment decisions, it is crucial to understand all the associated charges and fees. These costs can impact your overall returns, so conducting thorough research and comparing different options is essential before investing internationally.

Frequently asked questions