“Buying a stock is easy, but buying the right stock without a time-tested strategy is incredibly hard. So, what are the best stocks to buy now or put on a watchlist? Advanced Micro Devices (AMD), Target (TGT), Chegg (CHGG), Exact Sciences (EXAS) and Generac (GNRC) are prime candidates.”- investors.com
While searching for “best stock to buy now”
I came across investors.com. It’s a good site with lot of “stock to buy” ideas. But unfortunately, everything is in US. Think about me. I’m just an ordinary guy living in India and earning a normal salary. How can I invest in US? Won’t I need a lot of dollars to do that? Who will be my broker? What about the income tax part? With all these floating in front of my eyes, I was skimming through the web pages.
Why should I invest in the US market?
I was asking myself – there are so many stocks to buy in India. So many companies are there, with such bright future. This is the land which is going to be one of the biggest economies of the world in the coming decades. So why look elsewhere?
Wow, look at the returns!
In the last 10 years US market has outperformed the BSE Sensex consistently. I didn’t know this. So, I was shocked to see.
Dow has given a return of 196% from 2010 to 2020, whereas Sensex returned 150%. In addition to equity returns, the effect of currency fluctuations between INR and USD was also visible. In the past 10 years, the Rupee has depreciated 44% compared to the USD. This has a significant negative impact towards returns of Indian stocks widening the performance gap.
The bullish engulfing on the weekly chart of Target Corp was attracting me. For Indian investors a big benefit of investing in US is that the regulatory system there is very strict. There is a lot of transparency and standardized governance practices. This enables one to evaluate various opportunities correctly.
Thus, it definitely makes sense to directly invest in the parent company in US, rather than its Indian subsidiary which often quotes at richer valuation than its parent. On an average, investors from India are paying ~3X higher multiples (P/E trailing twelve months) when investing in the Indian subsidiaries vs. investing directly in the parent company in the US. And despite paying significantly higher multiples, the average returns can be similar.
The Reserve Bank of India has noted that a person like me can invest up to $250,000 in global market without any special permission. Thus, I have 3 ways to invest outside.
1. Open an overseas account with Indian brokerage:
This is the easiest way out for any Indian retail investor, as many full-service fund houses provide the access to invest in foreign stocks. Examples are 5paisa, Vested Finance, ICICI Direct, Reliance Money, Kotak Securities and various others. But soon I discovered that different brokerages provide different restrictions. Sometimes the restriction is on the number of trades and sometimes it is on certain investment vehicles.
2. Open an account with foreign brokerages:
The second option that I could see was to open an account with foreign brokerages like Charles Schwab International Account, Interactive Brokers, TD Ameritrade etc. They give access to Indian investors to open account and trade in US stocks. I found the fee structure a bit confusing. However, it will be better if you see it for yourself.
3. Buy Indian mutual funds/ETFs with global equities:
The third option for a common man is to invest through mutual funds of Indian companies that have global investment. ICICI Pru US Bluechip Equity, Motilal Oswal NASDAQ 100 ETF, Edelweiss Greater China Equity Direct and various others trade in global equities. This system is cost effective and simple as I will not have to open a separate account and maintain minimum balance.
How will I be taxed?
The income from sale of equities will not be taxed in US. It will be taxed in India. I spoke to a friend of mine who is a tax consultant, and got to know that there are 2 types of taxes under capital gains. One is short term capital gains tax and the other is long term capital gains tax.
- Tax on short-term capital gains (Currently):
Short term capital gains are taxable at 15%. What if my tax slab rate is 10% or 20% or 30%? Special rate of tax of 15% is applicable to short term capital gains, irrespective of my tax slab. Also, if my total taxable income excluding short term gains is below taxable income i.e Rs 2.5 lakh – I can adjust this shortfall against my short-term gains. Remaining short term gains shall be then taxed at 15% + 4% cess on it.
2. Tax on long-term capital gains (Currently):
Long term capital gain on equity shares listed on a stock exchange are not taxable up to the limit of Rs 1 lakh.
As per the amendments in budget 2018, the long-term capital gain of more than Rs 1 lakh on the sale of equity shares or equity-oriented units of the mutual fund will attract a capital gains tax of 10% and the benefit of indexation will not be available to the me. These provisions apply to transfers made on or after 1 April 2018.
The US is the world’s largest economy and is home to the world’s largest stock market. Its economy can be classified into 11 major investment sectors, which encompasses communication services, energy, real estate and utilities. Moreover, major Chinese companies like Alibaba and Tencent Music are listed in US. Thus, once I get my hands on the US market I can invest in Chinese stocks as well!
At this stage the idea of investing globally was growing strong within me. I had to know how do I open this account. What are the steps that I will have to follow? So, I am jotting down whatever I have learnt.
- First, I found that I will have to do online registration with basic details like name, email id, phone number etc.
- For documents, I will have to give ID proofs like PAN card, voter card, valid driver’s license, passport, etc. The utility bill or the mobile phone bill or even the bank or credit card statement may be provided as address proof. Alternatively, Valid driver license with address or Government issued Photo ID with address such as Aadhaar card or Passport will suffice.
- After my account is approved, I can add funds. Of course, I will have to link my account to my bank account.
- The last thing that I was concerned about was the forex rates. I got to know that some big international brokerage platforms have tie-ups with leading nationalized banks to provide good low forex rates to customers. Alternatively, my banker can help me in transferring funds.
As of now this is all that I can think of as far as due diligence from my end is concerned. If you think that I have missed out something please tell me. I have already invested in US through mutual fund. Now I would like to do it directly.
The below points should be remembered when it comes to global investment:
It is good to open an overseas trading account if you have the time and expertise to analyze the US market and economy and make informed decisions.
International investing attracts more charges as compared to domestic investments. So, we need to look for the account charges, brokerage, and currency conversion charges, etc.
Investing is more cost-efficient than trading in the US market. This is because high charges can eat away into the marginal trading profits. Long-term investing allows us to earn reasonable returns post-charges too.
It is important to consider applicable taxes as per the US and Indian taxation laws.
Lastly, we should start with little money and increase our investment size with more understanding of the US markets.