Interest in international investments has been on a rise among Indian investors. International investments, mainly focused on equities, have performed better than domestic equities in the past. This has made global equities a serious asset class to consider in every investment portfolio.

 

Why go international? Globalization has led to interesting developments in industry and commerce. Products and services are increasingly becoming global, and the companies behind them are continuously growing bigger as well. 

 

Besides growth, there are many valuable companies waiting to be discovered and become the next big thing. This presents an obvious question – why should your investment universe be limited to the 500 odd stocks traded within the country, when you can pick from 5000+ stocks from across the globe.

 

Once you have made your mind about investing abroad, you will have to find the right way to go about it. In this article, we will focus on US investing, mainly because that is the major trend and has the most number of service providers. Secondly, US stock exchanges contain a huge number of stocks, both domestic and global, thus offering more than enough choices for someone looking at global diversification. 

 

The first option is direct investing by opening a US brokerage account – you can do this through a domestic firm or bank having tie-ups with US brokers. This process requires signing up, completing know-your-customer procedure, converting rupees into dollars and transferring this to fund the brokerage account, and finally, making the desired purchases of stocks or any other investment of choice.

 

The benefit of this option is that you have complete control over the stocks you buy and sell. The downside in this option is that there is a lot of setting-up and charges involved. 

 

These are the charges you will encounter:

 

One-time account opening charges, annual account maintenance charges, brokerage charges on buy/sell, wire transfer charges (for both adding money and withdrawal), foreign exchange conversion loss, one-time W-8 Ben charges for tax certification.

 

There are companies who have reduced many of these charges, by offering free account opening and zero brokerage, besides tie-up with banks for lower wire transfer charges.

 

We have put down a list of few companies in India that are offering US/International stock investments. 

 

 

Please note, there are many more companies offering such a service, including many domestic brokerage houses and even many banks. We have focused on the ones that are popular or offer low cost trading.

 

As you can see in the table above, most of the firms have tied up with DriveWealth, a U.S. brokerage firm, to enable this service. Groww, Vested, IndMoney and Globalise seem to offer the lowest entry barrier to investing in US stocks, with zero or very low brokerage. 

 

How to select the right broker?

 

This will depend on your requirements. Some brokers offer extra services such as customized portfolios, one-to-one advisory, cash management services to build savings in a foreign currency, invest in a different country than US, etc. If you need any of such services, and the brokerage is reasonable or free, then go for such a broker.

 

Who should take this route?

 

People who want control over their stocks or those who want to access the U.S. bond market, or others who want to build their savings in a different currency can go for a broker directly. Considering the various charges involved, those who invest more than Rs 2 lac would see a lower impact of such charges on the total returns. 

 

Taxation

 

(1) Taxes on investment gains: You will be taxed in India for this gain. You will not be taxed in the US. Gains on stocks held for 24 months are considered as long-term capital gains and the tax rate is 20% with indexation benefit. 

 

Gains on stocks held for less than 24 months are short-term capital gains and are taxed at the slab rate. 

 

(2) Taxes on dividends: Dividends will be taxed in the US at a flat rate of 25%. But since US and India have a Double Taxation Avoidance Agreement (DTAA), the 25% tax paid in the US is made available as Foreign Tax Credit and can be used to offset your income tax payable in India.

 

Tax collected on source

 

As per the Finance Act of 2020, funds sent abroad under LRS (liberalized remittance scheme) are subject to 5% tax collected at source (TCS) with effect from October 1st, 2020. TCS will be levied at 5% for foreign remittance amount in excess of Rs 7 lac in a financial year.

 

Extra information –

 

Fractional shares – many popular stocks in the US are traded at a very high price, which may seem unaffordable for purchase. This is why brokers have started a service where they sell fractions of a share. For example, you can buy $1 worth of a $1000 share. Fractional shares do not have voting rights, and also cannot be shifted to a different broker.

 

*SIPC – the Securities Investor Protection Corporation is insurance on the cash and securities held in an account with a registered broker, in case the broker defaults or becomes insolvent. SIPC protects the

 

securities and cash in your brokerage account up to $500,000. The $500,000 protection includes up to $250,000 protection for cash in your account to buy securities.

 

Who holds the shares?

 

Shares bought from a broker are held with the custodian usually under a ‘street name’ registration. This means the shares are registered in the name of the broker, and the broker manages a book of record of who owns what. This also means that any corporate communication or reports are sent to the broker (and not to the investor). The dividend is paid to the broker, which is then transferred to the investor as payment in lieu. Brokers can lend the shares held in their name towards short-selling.

 

The second option for investing abroad is investing in an international focused mutual fund scheme. Many mutual fund schemes offer investing in popular indices like Nasdaq 100, S&P 500, etc. The cost of investment is also very low and can start at Rs 5,000 for lump-sum investment and Rs 1,000 for systematic investment plans.

 

The benefit of this option is that you do not have to worry about anything. You simply have to purchase units of the scheme investing abroad, and let the fund managers do the rest. The only charges involved here are the fund management expenses, which can be up to 2% of the total value of assets.

 

Investing in international mutual funds is simple, but it has its own disadvantages. These are – there is no control over the stocks picked, there are no bond funds to invest in nor any funds to hold cash reserves in a different currency, the expenses charged cost more for those with a bigger amount to invest compared to direct investing.

 

Taxation on capital gains of units of international mutual funds – 

 

Gains on units older than three years are considered as long-term capital gains and taxed at 20% rate with indexation benefit. 

 

Gains on units less than three years are termed as short-term capital gains and taxed at the slab rate.