# How do I get started with investing in the US markets?

## Diversification

Diversification is an important part of an investment journey. It helps one reduce volatilty and risk of one's portfolio, especially at larger portfolio sizes.

The rationale for diversification is clear — domestic equities tend to be more exposed to the narrower economic and market forces of their home market while stocks outside an investor’s home market tend to offer exposure to a wider array of economic and market forces.

Even though slightly limited compared to developed markets, Indian investors do have a significant opportunity to diversify their equity portfolios by investing outside their home market. And when considering foreign markets from an Indian investor's point of view, the most obvious choice that crops up is the US market.

## Reasons for choosing the US

### Size

As of 2018, U.S. equities accounted for ~44% of the global equity market, far greater than the next largest market China (~9%). Indian market capitalisation was ~3% of the global market.


> <https://www.indexmundi.com/facts/indicators/CM.MKT.LCAP.CD/rankings>
>
><https://howmuch.net/articles/all-stocks-capitalization-around-the-world>

### Correlation

Simply buying different stocks or other assets doesn't automatically result in diversification benefits. The assets into which one is diversifying should have low price correlation with the assets already present in one's portfolio. Price correlation measures how closely the prices of two different assets are related.

Price correlation can either be positive or negative - the closer to zero, the better. A high positive correlation (approaching `1.0`) means that the asset prices move in tandem, offering diversification in name only, while a high negative correlation (approaching `-1.0`) would mean that the investments' price movements will virtually cancel each other out, defeating the purpose of investing.

For example, large cap mutual funds will usually have a high positive correlation with the Nifty 50 index because many of the stocks held by these funds would be from the Nifty 50.


> https://www.motilaloswalmf.com/mf/SandP500fund/

The above table indicates that the Indian indices (Nifty 50 and Nifty 500) have a low correlation with the major US indices (Nasdaq 100 and S&P 500) as of Feb 2020. Hence, for an Indian investor currently investing only in Indian markets, it makes sense to diversify into the US markets.

### Marquee Names

Some of the biggest and most famous brands and companies are listed in the US. Think Apple, Microsoft, Google, Amazon, Tesla and many others. Many of these companies are also MNCs and have internationally diverisifed businesses and revenue streams.

## Ways to invest in the US

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

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

* **Indirect Investing:** Investing in Indian mutual funds, fund of funds or ETFs which invest in US companies' stocks.

### Direct Investing

This mode involves investing either via a international brokerage like Charles Schwab, or using a India-facing or India-based service provider like Vested which in turn provides platform to invest via a US-based brokerage like Drivewealth.

As a cursory check, investors must make sure that the brokerage one is investing with is registered with the SEC, FINRA and SIPC. One should bear in mind that the Indian securities market regulator SEBI doesn't have any effective oversight of these entities.

The U.S. Securities and Exchange Commission (SEC) is an agency of the United States federal government. It acts as the US securities market regulator, whose stated mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

The Financial Industry Regulatory Authority (FINRA) is a private American corporation that acts as a self-regulatory organization (SRO) which regulates member brokerage firms and exchange markets.
> https://brokercheck.finra.org/

The Securities Investor Protection Corporation (SIPC) is a federally mandated, non-profit, member-funded, United States corporation created under the Securities Investor Protection Act (SIPA) that mandates membership of most US-registered broker-dealers. The purpose of the SIPC is to expedite the recovery and return of missing customer cash and assets during the liquidation of a failed investment firm.
> https://www.sipc.org/list-of-members/
>
> https://www.sipc.org/for-investors/what-sipc-protects

An important point to note is that things like fees/charges, features and range of stocks available for investment vary from broker to broker and keeps changing over time. Some brokers also require a minimum account value (total value of investments held with that broker - similar to minimum relationship value used by banks) while others don't.

Please refer to the following [reddit thread](https://www.reddit.com/r/IndiaInvestments/comments/lpefwk/us_investing_options_for_indians_personal/) for the most recent discussion on some of the popular options.

#### Are there any limits?

Yes. Under the RBI's liberalised remittance scheme (LRS), resident Indians can invest up to USD 2,50,000 per Financial Year (April-March) for any permitted current or capital account transaction or a combination of both.
> https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10192&Mode=0

#### How will one be taxed for these investments?

When you invest in the US stock market directly, there are two types of taxation events:

* **Taxes on investment gains:** You will be taxed in India for this gain. Taxes will not be withheld in the US. The amount of taxes you have to pay in India depends on how long you hold the investment. The threshold for long-term capital gain is 24 months, with the rate of 20% with indexation benefit. If you sell a stock in less than 24 months, capital gains are considered short-term and are taxed according to your income tax slab.

* **Taxes on dividends:** Unlike investment gains, dividends will be taxed in the US at a flat rate of 25%. Fortunately, the US and India have a Double Taxation Avoidance Agreement (DTAA), which allows taxpayers to offset income tax already paid in the US. The 25% tax you already paid in the US is made available as Foreign Tax Credit and can be used to offset your income tax payable in India.

#### What documents does one need?

According to Vested, one needs a proof of ID and proof of address (All bills and statements must be within the last 3 months and must have your name on it). The whole process is paperless.

#### How does one fund one's account?

Investments in US equities must be made in USD. One has to first wire (remit) USD to one's broker's partner bank in the US to fund one's account. In order to do this, the investor must fill out an LRS form (called the A2 form) and submit it to their own bank. Do note that there are costs involved in the fund transfer process, varying according to the bank one uses. There is a fixed cost of between INR 500 – 1500 per fund transfer.

#### How does one withdraw funds?

On placing a withdrawal request, the money should be wired directly to your bank account in India. It may take 3 to 5 business days for the wire to come through.
Again, do note that the remitting bank will charge a fee for the transfer. Vested states that this fee is currently approximately USD 11.

For futher information, please check of the help or FAQ section of your broker's website. Vested FAQ can be found here:
> https://vested.co.in/faqs/

### Indirect Investing (MF/FoF/ETF investing)

This method involves investing in India-based mutual funds, fund of funds or ETFs which invest in US companies' stocks.

Most investors would already be familiar with mutual fund investing and hence, this is an easy and recommended way to get started with investing in US markets. Additionally, no further documentation is required apart from the standard KYC for mutual funds.

There are a variety of ETFs and MFs available for investing in the US. Some of them follow the active investing strategy where the fund manager decides which stocks to buy and sell, while others follow passive strategy where the fund simply holds the same stocks in the same ratio as they are present on popular indices like S&P 500 or the Nasdaq 100.

Some of these funds might be fund of funds. ie, the India-based MF simply buys units of another fund investing in the US markets (called the underlying fund). eg, the "Franklin India Feeder - Franklin U.S. Opportunities Fund" invests in the "Franklin U.S. Opportunities Fund, Class I (Acc)" fund which is an international fund investing in US stocks and run by Franklin Templeton in multiple countries.


While not necessarily a dealbreaker, investors should note that the Total Expense Ratio (TER) shown in the factsheet of such funds usually only includes the TER of the FoF/feeder fund. The underlying fund would also have its own fees (e.g., management fees, etc). The actual expense incurred by investors will also include this and will usually be the sum of both these, ie,

`TER of the FoF + total fees of the underlying fund`

To illustrate, let us look at the Franklin India Feeder - Franklin U.S. Opportunities Fund. As of 29 January 2021, its [factsheet](https://www.franklintempletonindia.com/downloadsServlet/pdf/franklin-india-feeder-franklin-us-opportunities-fund-fact-sheet-islnfdpp) mentions its expense ratio as `0.61%`.


While the underlying fund's [prospectus](https://www.franklintempleton.lu/download/en-lu/common/h2k8emo7/Franklin-Templeton-Investment-Funds-Prospectus-August-31-2020.pdf) mentions a management fee of `0.70%`.


So for an investor, as on 29 January 2021, the total expense charged would be:
`0.61 + 0.70 = 1.31%`

Hence, it is advisable for Indian investors to go through the prospectus or other such scheme documents of the underlying to get a better idea of any hidden fees and charges.