All about investing in US stock markets: Why to invest, how and what to buy – A Beginner’s Guide

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August 13, 2020 11:51 AM

A retail investor can choose between investing in mutual funds, ETFs or even use the LRS route to buy direct equities in the US markets.

 investing in US stock markets, Why to invest, investment opportunities, NASDAQ composite index, NASDAQ 100, FAANG stocks, Facebook, Apple, AmazonFor a retail Indian investor, there are several investment opportunities available in the US markets.

The US stock market has been on fire lately. While all the leading stock market indexes are above the level last seen before the March 2020 crash, it is the tech-heavy index that is leading the bull-charge. Even while the pandemic is still on the roll, the NASDAQ composite index and NASDAQ 100 are nearly 38 per cent and 45 per cent above their 1-year level, respectively.

In the post-COVID world even as the technology companies are looked upon as a must-have, the Dow 30 index comprising of the top 30 US-based companies is not giving up the fight. Dow 30 is up 8 per cent over the last 12 months, compared to 4.86 per cent of the Sensex over the same period.

As an Indian investor, the momentum some of the US stocks have shown cannot be ignored. Talking of specific companies, the FAANG – Facebook, Apple, Amazon, Netflix and Google (Alphabet) – have been the winner stocks especially since the start of 2020 and the growth looks promising looking at their recent quarterly earnings.

Investment Options

For a retail Indian investor, there are several investment opportunities available in the US markets. And, investing abroad as a part of the diversification process across geographies is a well-crafted strategy as well. “Compared to a decade ago, there are now many options for Indian investors to get exposure to the US markets. A retail investor can choose between investing in mutual funds, ETFs or even use the LRS route to buy direct equities in the US markets,” says Rishad Manekia, Founder and MD, Kairos Capital.

Active or Passive Approach

The exposure to the US markets through mutual funds can either be actively-managed MFs or passively-managed ones. “Mutual funds that invest in the US markets can be actively or passively managed by the mutual fund company. Actively-managed funds could be a fund of funds that invest in the US-focused global funds or they could be directly managed by the fund house. Some asset management companies also offer partial exposure to the US equities with the balance of the portfolio being in Indian securities. Passively-managed funds track the index; generally either the NASDAQ or the S&P500. ETFs are another option to look at for getting exposure to US indices, although investors should be careful to look at the volumes and liquidity of the security,” informs Manekia.

Why index funds, ETFs

More than the actively-managed funds that come with higher costs compared to index funds and ETFs, the latter are more popular in the US. Almost all indices have their index fund or ETF’s for the investors to invest in. For example, there will be ETFs or index fund tracking the Nasdaq index or the Dow 30 index. “Generally the trend in the global market has been towards passive investing. Investors have found that, after fees, most active funds globally are not able to outperform the benchmark and those that do are not able to maintain that alpha over time. Therefore, global investors have shifted toward investing directly in the index itself and have been comfortable with benchmark returns. Therefore, for Indian investors as well, it would be prudent to consider looking at the index-based products over active funds for the US markets,” says Manekia.

Direct Stocks

However, if you want to buy stocks or ETF’s directly, there are authorised brokerage firms that allow you to buy your favourite US stocks sitting at home in India. Going through such brokerages makes investing easy. Unlike the normal process wherein you need to register with your bank, get RBI clearances, find and open a US bank account or trading account, with foreign brokerage firms, one just has to log on, register and with a few clicks be ready to trade in international stocks.

Rupee-Dollar equation

The Rupee-Dollar exchange plays a role in the returns that your investment portfolio will generate from the US stock market. Over the long term, the weaker rupee against the dollar will be at your advantage. Manekia informs, “US equities have been in a bull market, with some of the highest returns globally in dollar terms over the last decade. In July 2010 the dollar was equal to around Rs 46, which is now around Rs 75. Therefore, an Indian investor who invested in the US markets a decade back would have seen phenomenal returns.”

Going forward

While most leading US indexes such as Nasdaq, S&P 500, and Dow 30 are showing promising returns, as an investor one needs to be clear as to what constitutes these indices. “The rally so far has been driven by tech firms such as Apple, Google, Facebook, Netflix and Amazon. These companies have been moving from strength to strength and have only gotten stronger through this pandemic. And therefore the NASDAQ, which has a more tech-heavy focus, has given even higher returns than the S&P500 which is more broadly diversified over the US economy,” adds Manekia.

What to do

Currently, the US indexes are trading at levels near to their highs. For long-term investors, taking exposure to the US market, that is a big driver of the world’s economies from a long-term view, can certainly be explored. Manekia, however, wants investors to be cautious too. “All good things come to an end, and we cannot escape the fact that we are probably in the last legs of a long US bull market. Therefore, for investors comfortable with the risk of investing in international equities, it makes sense to look at more diversified portfolios to lower the risk. And, they should also consider other geographies like the Asian and European equity markets where valuations are lower and where the economies are recovering from the pandemic faster.”

Conclusion

Consider international investing as a part of your diversification into global stocks. Routing your international investments through brokerage firms is a better approach as they offer investment packages based on different themes. Before you consider investing in global stocks, you need to be aware of the RBI’s Liberalised Remittance Scheme (LRS). LRS determines how much one can invest abroad by converting Indian rupees to US dollars and how exactly the transaction has to take place. Another reason to use the services of international brokerage firms – they do all the LRS paper-work and keep investing easy and simple for you.

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