From Dalal Street to Wall Street: How Indians can invest in the US stock market

How to start investing in listed companies in the USA sitting over India? Worry not, we will explore how Indian investors can invest in the US equity market.

In the last story, we talked about the growth of Nvidia over the past year. Now many Indian investors want to explore the growing space of EV and AI in the world as there are very few listed companies in India that can be considered among the top companies or prominent players in these sectors. To take advantage of these companies mostly all the big giants are listed in the US equity market.

If you want to know growth of Nvidia, also read: This chip-making company crossed the market capitalisation of Reliance Industries in a single trading session

Now the question is, how to start investing in listed companies in the USA sitting over India? Worry not, we will explore how Indian investors can invest in the US equity market.

Investing in the US stock market from India has become increasingly accessible in recent years thanks to advancements in technology and changes in regulations. The allure of the US stock market lies in its geographical diversity, stability, the benefits of a weakening rupee against the USD, the potential for high returns from technology companies and we can buy shares in fractions. We can invest in brands that we use the most such as Apple, Amazon, Meta, Google, Netflix, and many more. There are two ways in which you can invest in US equity.

Indirect Route:

Indian Mutual Funds and ETFs are two methods that can be used to invest in the US equity market. Mutual funds from Motilal Oswal and Franklin Templeton offer several mutual fund schemes that invest in the US equity market.

ETFs are similar to mutual funds in that they are also investment vehicles that pool money from several investors to purchase stocks, bonds or other securities. However, unlike mutual funds ETFs are traded on stock exchanges like individual stocks. Investing in USA-focused ETFs can be another indirect option.

It has been a month since most mutual funds with access to global equity strategies stopped accepting new money because they reached the SEBI-defined limit of USD 7 billion for the mutual fund industry. Until this limit is modified this avenue of investment is unavailable for now.

Direct Route:

Before opting for the direct route we should be aware of the Liberalised Remittance Scheme by the Indian Government. This scheme permits all resident individuals, including minors, to freely remit up to USD 2,50,000 per financial year. This means that we can invest a maximum of around Rs 2.08 crore in one financial year if we consider an exchange rate of Rs 83 per dollar.

In the direct method, there were traditional methods such as US brokers with offices in India or banks that offer services to invest in the US equity market. However, the problem with these methods lies in the high initial opening fees, high account maintenance charges, commission structures, high exchange rates, and high account balances which were only feasible for High Net Worth Individuals (HNIs).

The most effective way to invest in the USA equity markets involves two options. First, there is the NSE ISFC (International Financial Service Centre) recently launched by the National Stock Exchange (NSE) in the Gift City of Gujarat. Currently, there are 50 shares available for trading, including companies like Tesla, Nvidia, Alphabet, Microsoft, Apple, and other major names.

To get started, a person needs to open a trading and Demat account with an IFSC-registered broker. Many brokers are currently offering these services. All trades will be conducted in US dollars. It's important to note that investors won't actually purchase the physical US stocks of the companies through the NSE IFSC exchange. Instead, they will be issued depository receipts.

Depository Receipts (DRs) are financial instruments that represent an equity stock listed on a foreign exchange. DRs allow investors to hold equity shares of foreign companies without the need to trade directly on a foreign stock exchange.

NSE IFSC depository receipts are issued by HDFC Bank IFSC Banking Unit (HDFC IBU) based in Gift City. HDFC IBU buys and holds the actual US stocks on behalf of investors in the NSE IFSC exchange. They purchase the underlying stock of US companies from international exchanges such as NASDAQ or NYSE and hold them on behalf of investors.

The second option is to open an account with new-age Indian startups that have ties with US brokers. From there, you can begin your investment journey. While NSE IFSC brokers may have various fees and brokerages, these new-age startups offer zero maintenance fees and brokerage charges.

Taxation:

Taxation on US equity is slightly different from India. India and the USA have a Double Tax Avoidance Agreement (DTAA) therefore investors need to pay taxes to the Indian government only. In the case of US equity, Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG) are differentiated by a 24-month holding period. When it comes to dividends paid to Indian investors, there is a 25 per cent TDS (Tax Deducted at Source), but investors can claim a refund under Income Tax Rule No. 128.

Conclusion:

Investing in US companies, particularly in sectors like EV and AI offers Indian investors diversification, potentially high returns, and stability. This can be done directly through platforms like NSE IFSC or Indian startups. Understanding tax implications and the Liberalised Remittance Scheme is crucial for successful investment.

Disclaimer: The article is for informational purposes only and not investment advice.