Over the past few years, owing to increasing financial awareness Indian investors have understood the advantages of diversifying their investment portfolio. Apart from trying out different asset-classes, there has been increasing focus on investing abroad and for that, the US has been the favourite destination. There has been a correction of more than 25 per cent in Nasdaq Composite Index since its all-time high in November 2021 , due to the fundamental headwinds such as increasing inflation and subsequent increase in interest rates. As the correction continues to play out, it presents an opportunity which investors can capitalise going forward by investing directly in US stocks, as currently there are restrictions on actively-managed international mutual funds. Up to $250,000 can be invested by an Indian citizen under the liberalised remittance scheme (LRS) of the RBI each financial year if an investor wants to invest directly in US Stocks.

Different routes

What are the options to international investing? There are quite a few as mentioned below.

Podcast | Are you familiar with the different routes to investing in US stocks?  Podcast | Are you familiar with the different routes to investing in US stocks?  

One, you can directly open an overseas trading account with US brokers such as Interactive Brokers, Charles Schwab and Ameritrade.

Two, you can open an overseas trading account with Indian brokers and platforms, who have partnership with foreign brokers. For instance, ICICI Direct has a partnership with Interactive Brokers. Brokers such as HDFC Securities and Axis Securities have tie-ups with fintech platforms such as Stockal and Vested Finance respectively powered by a US-based back-end broker DriveWealth.

Three, investors can also directly open accounts in platforms such as Vested, Stockal, Winvesta, Indmoney. Certain brokers and platforms allow investors to invest in theme-based portfolios consisting of a curated selection of stocks by investment advisors. For instance, Interactive Brokers provides its customers access to the curated portfolios based on themes based on particular sectors, valuation, investors’ risk profile etc. Vested Finance has a product called Vests, through which investors are provided advisor-curated selection of stocks. Switching your portfolio among platforms is possible if the back-end broker is the same.

Four, international exchange arms of Indian bourses such as the BSE and NSE also offer you a way to invest in foreign stocks. India INX, India’s International Exchange launched by the BSE, provides investors with a centralised platform to route orders to multiple international exchanges through India INX Global Access IFSC (INX Global Access or INX GA). Here, investors are given access to 30,000 stocks; and it offers 22-hour trading window.

Take Note
Switching your US stocks portfolio among platforms is possible only if the back-end broker is the same 

Similarly, NSE, through its international exchange platform NSE IFSC, provides investors with a way to invest in US stocks through depository receipts (DRs) instead of actual shares. These are unsponsored DRs which are created through market making and issued by the custodian bank These receipts provide investors with a proportionate stake in companies and thereby let them receive every corporate benefit. The plan is to widen the DR universe from eight to 50 US companies. Trading hour window in this case is from 8.00 p.m. IST to 2.30 a.m. IST.

With regard to safety of investments, US stock investors are protected by the Securities and Investment Protection Council Insurance (SIPC insurance) by up to $500,000 split as $250,000 in cash and $250,000 in stocks for investment in the US.

Pricing, fees

While investing through these platforms, there are multiple costs which we should look at such as remittance fee, foreign currency conversion mark-up, withdrawal fee, account opening fee and brokerage.

While you are not compelled to do a fund transfer during account opening, do note that some platforms require you to transfer a minimum amount each time you add funds. For instance, a minimum of $100 needs to be transferred to Interactive Brokers every time you add funds. Fixed fees and foreign conversion mark-up are charged during each such transaction. Generally, the fixed costs are in the range of ₹500-1,000 plus GST and currency conversion mark-up is charged as percentage of the amount transferred (2-3 per cent). Also, broking charges differ depending on the route. Even if the underlying US broker is the same, charges shall be different.For instance, going through ICICI Securities (which has tied up with Interactive Brokers), brokerage charge is $2.75/trade under its basic plan. However, if you are direct customer of Interactive Brokers, then the brokerage charge is $1 per order up to 200 shares and a trade of more than 200 shares would cost you 0.5 cents per USD.

Withdrawal of funds will also come at a cost. For instance, Vested Finance charges $11 per withdrawal, while Interactive Brokers would give its customers one free withdrawal per month and for subsequent ones, $10 would be charged per withdrawal.

Taxes

There are two types of taxation events. One, you shall be paying tax on capital appreciation for which you will be taxed in India and not in the US. If you hold stocks for more than 24 months, you will be paying capital gains taxes of 20 per cent. If you sell stocks before 24 months, the profits, if any, would be qualified as short-term capital gain which will be added to your taxable income, and you would be taxed as per the income-tax slab applicable to you.

Two, you will also be paying taxes on dividends. Dividends received will be taxed in the US at a flat rate of 25 per cent. The US and India have a Double Taxation Avoidance Agreement, on account of which investors can offset income tax already paid in the US. Hence, the dividend received/reinvested by an Indian investor will be added to the taxable income and the investor charged tax as per income-tax slab applicable and the tax charged in the US will be offset against that.

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