The US is the world’s largest economy by GDP and the powerhouse of innovation and growth. No wonder a lot of Indian investors want to buy stocks of US companies and be a part of this great economy.

I believe that investing in the US stock market is a great idea but it should be done only after making some very important considerations.

In this session, we will discuss the 3 ways you can invest in the US stock market and all the important considerations you have to make before jumping in.

First, why invest in the USA when we have a thriving stock market in India?

The first biggest reason, I believe is innovation and growth. The companies in the United States are way ahead when it comes to their technological innovation and their emphasis on research & development keeps giving them that competitive advantage.

Compare, for example, their technology companies with ours. I don’t remember the last time I used a product or service from TCS or Infosys or any other Indian IT company but sure do have an iPad, a MacBook, use Facebook, Twitter, and just this morning got products delivered from Amazon. Do you see what I am saying? US companies are dominating the technology space.

The second reason why the companies in the United States are doing better than ours is their geographical reach.  While Indian companies are predominantly focused on Indian consumers, the US companies are reaching around the globe to increase their customer base. This increases their growth potential and expansion capabilities.

The third reason to look outside India is diversification. By diversifying our investment in other countries, we are reducing the risk associated with the Indian economy. For example, if there is a war or natural calamity that slows down India’s economy for a few years, investments in the United States can continue to grow. As they say, don’t put all your eggs in one basket.

OK, now that we have made a good case for investing in the US, let’s talk about How we can do it?

The first method is by opening an overseas trading account through our domestic brokers.  You can open these accounts through brokers such as Kotak Securities, ICICI Securities, Religare etc. These brokers have tie-ups with foreign brokers who, in turn, have access to US markets. For example, ICICI Securities has a tie-up with Saxo bank through which you get access to the US market. The process of account opening is a little tedious and requires additional documentation and declarations. You can find the link to these brokers in the description below.

Be aware that there are certain limitations with these accounts such as no margins to trade and you can not short from an Indian account. There is a maximum limit to the investment you can make but that should not be a big deal if you are a long term investor.

The main problem that I see in this method of investing is the high cost of brokerage and high currency conversion charges. Brokerages are of course higher but you also have to deal with charges whenever you convert money from INR to USD and from USD to INR. These charges can add up quickly if you are an active investor. So, please make sure you clearly understand the charges before opening an overseas trading account.

The second method of investing in the US market is by directly opening accounts through international brokers such as Interactive Brokers, Charles Schwab and TD Ameritrade. Interactive Brokers has an office in Mumbai so you can directly call them to get information about these accounts. Their contact details are in the description below. Again, just like the first method, this method of investing is expensive and should only be done if you have clarity on the charges.

The third and indirect way of investing in the US market is to go through Indian mutual funds that are investing in the US stock market.  Some of the mutual funds are Franklin Templeton, Motilal Oswal, Kotak Mutual Fund, Edelweiss, ICICI etc.,

The benefit of this approach is that it is much simpler. You don’t have to deal with account opening, high transaction charges, currency conversion etc. Also, these mutual funds are run by professional fund managers who have much better access to information about what’s going on in the US economy than you and I.

Similarly, you can invest in ETFs such as Motilal Oswal NASDAQ 100 fund.

Now, here is my advice:

The first is about Overseas trading a/c vs. Mutual funds

You should open an overseas trading a/c only if you know exactly shares of which companies you need to buy and that should be backed with solid analysis. If you don’t have that clarity, then investing through mutual funds is a better idea.

Don’t get too fascinated by the tech stocks.

Just because you see everyone using their products or services doesn’t mean that they are great investment opportunities. If you would have invested in Facebook at the beginning of 2018 by the end, you would have lost 30% and some 15% in Apple. So do extensive research before making any decision.

Costs involved

The cost involved in investing directly in US companies is considerably high. When you add up the brokerage, account charges, currency conversion charges etc, I wonder whether it’s all worth the effort. Either way, you should not ignore them.

Taxes

Don’t forget that if you invest directly in the US market through an overseas trading account, you will have to pay the taxes based on tax rules in that country. The US considers any profit made within 3 years of investment as short term gains and they are taxed at 20%. So any profits will come after deducting the taxes. You will also have to make disclosures in Indian tax returns.

Invest, don’t trade

A lot of traders want to trade in the US stock markets and I think that is a very bad idea because the cost of brokerage and currency conversion is disproportionately high and will eat into any profits you would make. Therefore, my advice is that if you want to participate in the US market, do so by investing and not trading.

Don’t put more than 10% capital in outside markets.

Sitting here in India, we don’t know as much about the US market as we think we do. So, don’t risk more than 10% of the capital in that market or any market for that matter.

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