Investment Planning 2020: Investing in US stocks from India can be profitable in present times. However, you need to know the basics right to make the most of the opportunity. These basics include awareness of tax implications, investment process, remedies available against fraud, and some of the common challenges faced by Indian investors. In an e-mail interview with FE Online, Viram Shah, CEO and co-founder of Vested Finance, explains almost everything you need to know about investing in the American stocks. Excerpts:
What are the top challenges faced by Indian investors when they want to invest in the U.S. listed global brands?
The key challenges faced by the Indian investor are three-fold:
Financial barriers to entry: The solutions available until now enforced minimum investment requirements and required investors to buy full shares. For example, you would require a minimum $5,000 (INR3.5 Lacs) or to buy Amazon you would need to shell out $1,800 (INR1.3 Lacs) in one go. Further, commissions were very steep – you would need to pay $5 – $8 or INR 350 – INR 560 for each trade.
Cumbersome process: The user experience for an investor to invest in U.S. stocks was poor. The account opening process took days, to transfer the funds one would need to visit a bank branch, and the platforms were not localized for the Indian investor’s pain points.
Lack of information: While Indian investors are very familiar with the local markets, information on how to invest in the U.S. markets was very scarce. One would have to spend a lot of time to understand things like how taxation works, how to go about the fund transfer, what kind of ETFs are available etc.
How Indian investors can make the most of investing in US stocks
Investors can choose to invest in some of the global brands that they understand and use. They can also invest in companies that are operating in the industry that they already work in India.
Along with investing in individual companies, investors should take advantage of a wide range of ETFs or Exchange Traded Funds that are available in the US. These ETFs provide an easy way to build a diversified portfolio. For example, Vanguard’s Total World Stock ETF allows you to hold stocks from across the world or Charles Schwab’s US Dividend Equity ETF allows you to invest in large dividend-paying companies in an easy manner.
How to invest in American stocks from India?
The investing process includes four key steps:
Onboarding: The investor undergoes a KYC process to open a US brokerage account. Verification usually requires his or her PAN number, PAN card scan and a proof of address.
Remit USD: Once the account is open, the investor would need to fund his or her account with USD in order to invest. This process involves following the RBI’s Liberalised Remittance Scheme guidelines and remitting USD via their bank account.
Buy/sell shares: Once the account is funded, the investor can start investing in US-listed stocks and ETFs.
Withdraw to INR: Investors can choose to hold cash in their account or if they want to bring the funds back to India, they can choose to withdraw into their India bank account.
What kind of Indian investors should invest in US stocks?
Investors who have a long-term mindset are best suited to invest in the US stock market. Due to RBI regulations trading in the international markets is not allowed for Indian investors.
Compared to the Indian stock market, will it really benefit Indian investors if they invest in the US stock? If yes, then how?
Access to the US stock market provides an additional asset class that investors can add to their portfolio. Adding exposure to the US stock market helps achieve geographic diversification, something that has been lacking in the majority of our portfolios. Further, since the holdings would be in US Dollars, this portfolio provides a hedge against the INR (INR has depreciated 39% against the Dollar in the last 10 years). For investors who have upcoming USD spending (say for their child’s foreign education), building a USD corpus helps eliminate currency risk. Lastly, the US stock market gives the opportunity to invest in disruptive new-age technology companies that are not available via local markets.
What are the top risks Indian investors are exposed to when they decide to invest in US-listed stocks?
Apart from general market-related risks, the key additional risk that Indian investors are exposed to is Forex risk. Since the investments are in USD, this requires converting funds from INR to USD and back to INR when bringing them back.
Additionally, since this is a new market for most investors, there is the possibility of an investor taking additional risk than they should be taking given their age, income, portfolio size, etc. There are a wide range of investment products available in the US market and investors should only invest in the products that are suited to their risk capacity.
What are the remedies available to Indian investors in case they face some fraud while investing in the US-listed stocks?
Firstly, an investor should ensure that the platforms or companies they are investing through are regulated by the SEC (US version of SEBI). The platforms could have a license as an Investment Advisor or as a Broker. The licenses can be checked here. For example, Vested Finance is an SEC-registered Investment Advisor and in turn works with a broker called Drivewealth. The licenses for both can be seen here and here.
Each brokerage accounts in the US is usually insured up to $500,000 by the Securities Investor Protection Corporation. The investor can check if their broker is part of this insurance program by looking for the broker’s name here.
The Securities Investor Protection Corporation in the US has outlined multiple things one (even international investors) can do to protect from fraud. They have provided these details on their website here.
What are the tax implications of investing in American stocks for Indian investors?
Investors could face two types of taxation events:
Taxes on investment gains: For this, they will be taxed in India only, they will not be taxed in the US. The amount of taxes that have to be paid in India depends on how long the investment is held. 24 months is the long-term capital gain threshold and the long-term tax rate is 20% with indexation benefit. Below 24 months is short-term capital gain and is taxed according to the investor’s income tax slab.
Taxes on dividends: Unlike investment gain, dividends are withheld in the US at a flat rate of 25%. However, US and India have a Double Taxation Avoidance Agreement (DTAA), which allows taxpayers to offset income tax already paid in the US. The 25% tax paid in the US is made available as Foreign Tax Credit and can be used to offset income tax payable in India.
What is Vested Finance? How do you help Indian Investors?
Vested Finance a five-month-old first commission-free US stock investing platform for Indians. It is an SEC-registered investment advisor. We have lowered barriers for Indian investors to invest in the US stock market by offering – paperless KYC, fractional shares, commission-free trades, and pre-built portfolios called Vests. The number of brokerage accounts opened via our platform has been growing at 30% month-on-month.