Domestic investors have lapped up equities aggressively in the last few years. Digitalisation in the investment industry has made it easier to pick stocks with just a few finger taps on their smartphones. This digitalisation has crossed the geographical boundaries as stock investment is not only restricted to domestic stock exchanges.
Thanks to different investment mediums such as our partner Vested, Indians can purchase US stocks with ease. As the business and risks have gone overseas, geographical diversification in one’s portfolio has gained importance. They add appeal to the portfolio beyond sectoral, industrial and market capitalization related diversification.
Stock investment is a nascent interest of millenials across the globe. It gained momentum when the equity markets nosedived in the first quarter of 2020, when the pandemic spooked the investors worldwide. However, the recovery in the markets has been steeper and sharper than expected.
Why US stock markets?
The United States or the US is the world’s biggest stock market which is home for the numero uno quality companies like Apple, Facebook, Amazon, Netflix, Microsoft, General Motors, Tesla and Google’s parent Alphabet. Buying such stocks allows investors to participate in their growth and have a bit in the best quality shares available.
The elite club of Global mega-cap technology giants, also known as FANMAG had delivered as much as XX returns in the last 2020. Performance of FANMAG counters in 2020 and till June 1, 2021 has been absolutely astounding.
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The combined market capitalization of these companies stood at over $8.75 trillion, almost thrice BSE’s total market-cap of $2.9 trillion. FANMAG’s total market-cap now beats the market value of all companies listed on the Shanghai Stock Exchange, Hong Kong Exchanges, and Tokyo Stock Exchange.
Other blue-chips from US markets, such as Etsy, Nvidia Corp, PayPal Holdings, L Brands, Albemarle Corp, Advanced Micro Devices, ServiceNow have gained up to 300% in 2020.
When the equity markets crashed in 2020, not many of Indian blue-chips had turned multibaggers. Domestic investors were awestruck with a 120% rise in domestic behemoth Reliance Industries in just a few months.
In 2020, only one Nifty stock- Divi Laboratories- doubled investor’s wealth. Just seven other counters including Tata Consumers Products, Dr. Reddy’s Laboratories, Infosys, Cipla, HCL Technologies, Wipro and Asian Paints had gained over 50% in the entire year.
Despite the liquidity gush and secular rally in 2002, as many as 15 nifty50 stocks failed to deliver positive returns in 2020. IndusInd Bank and Coal India lost over one-third of their value in 2020.
Among the other Indian players from broader markets, Tanla Platforms, Alok Industries, Adani Green Energy and Karda Constructions had delivered between 400% and 850% return in the entire 2020. Only 20 companies had gained over 200% in the pandemic hit year.
If we consider the performance from for 17 months month till June 1, 2020, half a dozen names from Nifty50 index, including JSW Steel, Tata Steel, Divis Laboratories, Wipro, Adani Ports and Tata Consumer Products have gained over 100% in one year, with another dozen shares surging 50-100%
then only a dozen companies have rallied over 500% so far. Tanla Platforms is again the leader of the table, gaining up to 1,200% followed by Subex (900%), Adanit Total Gas (750%) and Adani Green Energy (730%).
There is nothing wrong in equity investment in India. The purpose of this research is to educate investors about the good opportunities available overseas and help them in building a diversified portfolio. As it is well said, ‘One should not put all eggs in one basket.’
Reason to Invest in US Stocks
In its Liberalized Revenue Scheme (LRS), the Reserve Bank of India or the RBI has allowed Indian residents to invest up to $2.5 lakh dollar per year in overseas investment avenues, without any special permissions. One must understand the purpose of making such investments.
* US stock markets are more mature than India stock markets and thus are less volatile.
* US stock markets allow you to invest in such top notch companies from different sectors.
* US Stock markets have companies that are more advanced in terms of technology and corporate governance.
* Global innovations in equity markets usually start from the US, allowing the first mover’s advantage.
How can one invest in US markets
There are two ways that one can invest in US Stocks markets from India.
- Direct Investment (buying stocks)
- Indirect investment (via mutual funds or ETFs)
Let us understand them one by one.
- Direct Investment
If an investor wants to buy US stocks, then he/she can open a trading account with a domestic or foreign affiliated brokerage to make purchases overseas. Also, investors must know that US stocks are generally very expensive in terms of price. However, an investor can buy a small portion of the stock.
For instance, If you don’t wish to buy a complete share of Apple, then you may buy 0.5% stake in Apple’s share or even 0.1% stake in the share. Such a facility is not available in Indian stocks.
Various homegrown brokers and apps have tied up with international stock brokers, particularly in the US, acting as intermediaries to execute trade. One can open a trading account with such brokers, with the complete set of required documents for the purpose.
However, investors must understand the certain restrictions. Indian investors may have faced certain barriers like numbers of trade executed in a particular time frame. Indian investors can not short US stocks, that is, selling the stock at higher price and then buying them at lower price.
Investors must also calculate the brokerage as the brokerage in such investment vehicles is higher. One has to be cautious about the currency conversion charges as well. Thus, calculate the complete cost before making any move.
One can also open trading accounts with the foriegn brokers, if it has presence in India. However, one must ensure the fee and charges before opening such accounts as it can lead to a heavy toll on your pockets.
- Indirect Investments
Like domestic investments, you can take an indirect position in US stocks without investing in them directly.
This is the easiest way to invest in US stocks and have a geographical diversification for your portfolio. Various fund houses have different schemes benchmarked with different indices of US markets. Such medium does not require an overseas trading account and investment can begin from as low as Rs 100 per month.
There are many mutual funds that invest in US stocks and/or mutual funds. One can invest in these funds if he is unsure of the US Stocks and offload the hassle of choosing the right stock to the fund manager. Even one can go to passive funds as well. Ensure that you pay close attention to the expense ratio of the mutual fund scheme before buying.
Exchange Traded Funds or ETFs
One can also gain exposure to US stocks by investing in ETFs via direct and indirect routes available for the same. One can purchase US ETFs directly via a domestic or international broker. There is also the option to purchase an Indian ETF of international indices, which is perhaps more cost effective.
Things which one must not miss
* If you buy stock directly on US exchanges, ensure that you have done your homework completely and understand the US economy.
* International investment attracts more charges, making it a costly affair. Ensure the account charges, brokerage, currency conversion, minimum balance, annual account maintenance fee, etc before making a final call.
* One should avoid trading in US markets. There are certain social, political, economical and financial barriers, beyond the control. Equity markets are very dynamic and volatile in nature and risk can not be ruled out. Also, trading makes marginal profits, which are likely to be engulfed due higher conversion margins and breaking charges.
* Consider applicable taxes as per the US and Indian taxation laws.
* Start with smaller bets and understand the market. Increase investment as you gain an understanding and knowledge of the US markets. Build a strong portfolio for yourself.
Summing it up
Investing in US stocks will add a new dimension of diversification in your portfolio. However, understand that international investment has its own advantages and consequences, just like equity investment in Indian share markets has its own.
Hence, ensure that you consider all aspects and invest according to your financial goals and risk tolerance. Do not push your limits and a strong balance between your greed and fear.