Ways to invest in the US Stock Market from India
There are three main ways in which an Indian can invest into the US markets. Each of these options have their pros and cons so you would need to evaluate which of them suites you the best.
Author: Viram Shah, CEO and Co Founder, Vested Finance
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Viram Shah, CEO and Co Founder, Vested Finance |
International diversification is the talk
of the town currently amongst fund managers and investors. Partly because in
this period of uncertainty the US markets have recovered faster than the Indian
markets (the S&P 500 has given -8% returns in 2020 versus Sensex has
returned -25%) but partly also because it’s an idea whose time has come (and
was long due). A lot of us in India suffer from what is called Home Bias – a
term that means that we prefer to invest in our home country because we
overestimate the risk of investing internationally. This bias actually leads to
a sub-standard investment portfolio, that is, we are not putting our money to
the best use.
of the town currently amongst fund managers and investors. Partly because in
this period of uncertainty the US markets have recovered faster than the Indian
markets (the S&P 500 has given -8% returns in 2020 versus Sensex has
returned -25%) but partly also because it’s an idea whose time has come (and
was long due). A lot of us in India suffer from what is called Home Bias – a
term that means that we prefer to invest in our home country because we
overestimate the risk of investing internationally. This bias actually leads to
a sub-standard investment portfolio, that is, we are not putting our money to
the best use.
In order to create a better portfolio, we
need to overcome home bias and look at opportunities available in international
markets. When one thinks of international markets, what better than investing
into the US markets – that largest stock market in the world with a market cap
of more than $40 Trillion. Investing in the US market provides three main
opportunities: 1) Access to a variety of asset global classes, one can invest
in stocks, bonds, real estate from across the world, 2) access to technology
companies the likes of which we do not have available in the Indian stock
market, and 3) the opportunity to diversify your currency exposure by investing
in USD (vs. the rest of your portfolio that is in INR).
need to overcome home bias and look at opportunities available in international
markets. When one thinks of international markets, what better than investing
into the US markets – that largest stock market in the world with a market cap
of more than $40 Trillion. Investing in the US market provides three main
opportunities: 1) Access to a variety of asset global classes, one can invest
in stocks, bonds, real estate from across the world, 2) access to technology
companies the likes of which we do not have available in the Indian stock
market, and 3) the opportunity to diversify your currency exposure by investing
in USD (vs. the rest of your portfolio that is in INR).
There are three main ways in which an
Indian can invest into the US markets. Each of these options have their pros
and cons so you would need to evaluate which of them suites you the best.
Indian can invest into the US markets. Each of these options have their pros
and cons so you would need to evaluate which of them suites you the best.
Indian
Mutual Funds
Mutual Funds
Indian mutual funds can invest up to 35%
of their assets into foreign markets. Some mutual funds have done well by
leveraging this foreign allocation limit. One such mutual fund is the Parag
Parikh Long Term Equity Focus fund.
of their assets into foreign markets. Some mutual funds have done well by
leveraging this foreign allocation limit. One such mutual fund is the Parag
Parikh Long Term Equity Focus fund.
Index
ETFs
ETFs
You can also invest in ETFs that track
the Nasdaq 100 and the S&P 500. Index investing has become really popular
over the last decade as investors have realized that mutual fund
the Nasdaq 100 and the S&P 500. Index investing has become really popular
over the last decade as investors have realized that mutual fund
managers are unable to beat index
returns and thus paying the mutual fund expense ratio is futile. Motilal Oswal
recently launched an S&P 500 ETF.
returns and thus paying the mutual fund expense ratio is futile. Motilal Oswal
recently launched an S&P 500 ETF.
Feeder
funds
funds
These are mutual funds that are
essentially investing in an underlying mutual fund in the US. This structure is
called a Fund of Funds structure. Franklin Templeton’s US Opportunities fund is
one such option.
essentially investing in an underlying mutual fund in the US. This structure is
called a Fund of Funds structure. Franklin Templeton’s US Opportunities fund is
one such option.
All of the above options provide an easy
way to get started in the international markets. One can purchase them from
their existing mutual fund provider. However, there are a few downsides to consider:
way to get started in the international markets. One can purchase them from
their existing mutual fund provider. However, there are a few downsides to consider:
1.
Expense
ratios can be high: For
a feeder fund you are essentially paying double the expense ratio. For ETFs you
pay 10x the cost against if you were buying the ETF directly. For example, the
Motilal Oswal S&P 500 has an expense ratio of 0.5% to 1% versus the
Vanguard S&P 500 ETF that has an expense ratio of 0.03%.
Expense
ratios can be high: For
a feeder fund you are essentially paying double the expense ratio. For ETFs you
pay 10x the cost against if you were buying the ETF directly. For example, the
Motilal Oswal S&P 500 has an expense ratio of 0.5% to 1% versus the
Vanguard S&P 500 ETF that has an expense ratio of 0.03%.
2.
Lack
of flexibility: Investing
in an index or a feeder fund do not give an investor the flexibility to take
advantage of the diverse opportunities available on the US markets. For
example, you might want to invest in emerging themes such as self-driving cars,
cannabis, artificial intelligence but these options are not available through local
funds.
Lack
of flexibility: Investing
in an index or a feeder fund do not give an investor the flexibility to take
advantage of the diverse opportunities available on the US markets. For
example, you might want to invest in emerging themes such as self-driving cars,
cannabis, artificial intelligence but these options are not available through local
funds.
This is an option that is now becoming
more and more accessible to Indian investors. You can now open a direct
brokerage account in the US the same way you open an account in India. You can
then directly load USD in these accounts. Every Indian resident can invest up
to $250,000 per year under the RBI’s Liberalised Remittance Scheme. Earlier
this option had multiple high barriers to entry such as a cumbersome account
creation process, high commissions per trade and a difficult fund transfer
process. Now commission-free platforms like Vested have become available that
simplify the direct investing process. One thing to keep in mind is that there
are certain fund transfer costs charged by the banks, so this option becomes
unviable for small investment amounts.
more and more accessible to Indian investors. You can now open a direct
brokerage account in the US the same way you open an account in India. You can
then directly load USD in these accounts. Every Indian resident can invest up
to $250,000 per year under the RBI’s Liberalised Remittance Scheme. Earlier
this option had multiple high barriers to entry such as a cumbersome account
creation process, high commissions per trade and a difficult fund transfer
process. Now commission-free platforms like Vested have become available that
simplify the direct investing process. One thing to keep in mind is that there
are certain fund transfer costs charged by the banks, so this option becomes
unviable for small investment amounts.
In conclusion, it is important now more
than ever to ensure that one’s wealth is not completely concentrated in one
currency or one country and geographic diversification via the US investing options is an great way that reduce this currency and country risk.
than ever to ensure that one’s wealth is not completely concentrated in one
currency or one country and geographic diversification via the US investing options is an great way that reduce this currency and country risk.
(Viram Shah is the CEO and Co- Founder at Vested Finance. He has more than three years of experience in investment banking at J.P. Morgan in India, covering Asian Telecom, Media, and Technology clients. He has also worked with startups in the data analytics, fintech, and machine learning space. Views expressed in the article are of the author.)
