How to invest in US equity from India?

How to invest in US equity from India?

Short answer: Try to Invest in a cost-effective manner. For smaller corpus, it makes sense to invest via India-domiciled mutual funds that invest overseas, while for someone with a larger corpus, it could be cheaper to invest directly

Let’s discuss this in detail in this episode of market secrets investment series.

Investing in US equity markets can be rewarding, if done for the right reasons, with right expectations which we discussed in detail in the last 2 episodes. When it comes to overseas investments; costs are usually the biggest factor to keep in mind. Unlike market returns, costs are in your control, and can be a determining factor in outcome of your investing journey.

There are currently two main ways in which retail Indian investors can invest in US stock market:

• Direct Investing: Investing via a platform or broker, which allows one to direct buy US stocks, ETFs, and other securities directly.

• Indirect Investing: Investing in India-domiciled mutual funds, FoFs (Fund of Fund – a mutual fund investing in another mutual fund), or ETFs (Exchange Traded Fund) which invest in US companies’ stocks.

If one is investing in smaller amounts (or SIPs) of less than ₹2L or so at a time, India-domiciled mutual funds are the more efficient choice due to lower costs (as low as 0.49% TER currently) and a simpler tax compliance process.

Let’s get into the detailed analysis now.

There are India-domiciled US index funds available to retail Indian investors at reasonable low costs.

For instance, the Motilal Oswal S&P 500 Index Fund Direct Growth, is available at a relatively reasonable TER (Total Expense Ratio) of 0.49% (as of 2021). There are also actively managed funds starting at a slightly higher (but still pretty reasonable) TER; that offer exposures to US equity markets.

But if one were to try and invest directly, one would run into a few challenges. At present, the international fund transfer process is cumbersome and expensive. Mainly because of the various aspects:

• Banks typically charge ₹500 – ₹2500 for every single international fund transfer. So, you will lose 3-5K easily when you deposit and withdraw funds.

• There is another 1% in currency spread / forex costs on the transaction, that’s incurred for every transfer. A conversion spread means you get to buy USD from bank, at higher price than it’s worth, and sell to bank at lower price, than it’s worth at that time. So you will lose 2% of your money when you deposit and withdraw funds.

• There is an LRS form (called the A2 form) that needs to be physically submitted and presented to the bank for international transfers for the purpose of investing. Some banks might pick up this document from your place, or allow an online submission, but it can take up to two weeks for the funds to show up in your international trading account. Which means two weeks of opportunity and interest cost.
• The same costs and time, when withdrawing the funds back to Indian bank accounts; effectively doubling all above costs.

As a result of the above fees and taxes, average retail investors might lose up to 5% of their capital even before they’ve bought a single stock.

In additional to the fund transfer process, there’s also the additional overhead of higher tax compliance when it comes to investing directly. For instance, one has to declare their directly held foreign shares under foreign assets while filing one’s ITR.

Because of the cumbersome and expensive fund transfer process and additional tax compliance, it is recommended that for now, Indian retail investors should prefer India-domiciled mutual funds and ETFs for investing in the US.

So if the amount you are investing in US equities is low (within 10L) stay with indian domiciled funds.

On the other hand, as you invest and accumulate larger and larger corpus; the proportional cost model (i.e., where you get charged a percentage of your asset size) becomes costlier.

For instance, if you’re investing ₹50,00,000 (50 Lakhs INR) in US equities, an effective expense ratio of 1% would eat away 50,000 ( INR), every year. At that corpus size, it might be cheaper to actually invest directly into a US ETF (domiciled in IRE / LUX), and incur compliance costs.

For more details and explanations, watch the video: