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

## Why should one invest in markets outside India?

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.

## Why should one choose 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.


* 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.

As seen in the table below, US markets have historically, had low correlation with Indian 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.

## What are the ways one can 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 platform or broker which allows one to buy US stocks, ETFs and other securities directly.

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

## Should one invest directly or through India-domiciled mutual funds/ETFs?

### TLDR version
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.

### Long version

There are India-domiciled US index funds available to Indian investors at reasonable costs. For instance, the Motilal Oswal S&P 500 Index Fund is available at a relatively reasonable total expense ratio (TER) of 0.49% (as of 25 March 2021). There are also actively managed funds starting at a sightly higher (but still pretty reasonable) TER.

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:

* Banks charge ₹500-1500 for every single international fund transfer.
* There is another 1% in currency spread on the transaction that gets eaten up for every transfer.
* 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 India.

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

See this [comment from Zerodha](https://tradingqna.com/t/why-is-zerodha-taking-so-long-to-offer-us-investing/77246) outlining the pain points for Indian investors investing in US stocks directly.

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](https://web.archive.org/web/20201125225937/https://www.financialexpress.com/investing-abroad/featured-stories/taxability-of-foreign-shares-in-india-know-the-tax-treatment-on-sale-of-shares-dividend-income-and-itr-filing/2017049/) 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.

## How can one estimate the charges for direct investing?

One's fees will vary depending on the bank or service one uses, and tends to get more reasonable as a fraction of total investments the larger one's investment amount is. As an illustration one can refer to the below table.

| Amount to invest | Remittance Charges + Taxes | Investible / Redeemable Amount | Broker charges - to transfer money to your Indian bank a/c ($35) | Amount credited to bank a/c | Actual Returns |
|---|---|---|---|---|---|---|---|
| 10,000 | 600 | 9,400 | 2500 | 6,900 | -31%|
| 50,000 | 750 | 49,250 | 2500 | 46,750 | -6.5% |
| 1,00,000 | 900 | 99,100 | 2500 | 96,600 | -3.4% |
| 5,00,000 | 1250 | 4,98,750 | 2500 | 4,96,250 | -0.75% |
| 10,00,000 | 1700 | 4,98,300 | 2500 | 4,95,800 | -0.42% |

*Note 1: All amounts are in INR and may have been rounded off for simplicity.*

*Note 2: Remittance charges may vary from bank to bank. For simplicity, we've used the average of remittance charges across HDFC, ICICI and SBI banks. You may notice a slight difference depending on which bank you use.*

*Note 3: The above table doesn't include forex spreads which are around 1%.*

*Note 4: USR/INR rate used for conversion is $1 = ₹72.5*

## Which are the common platforms which one can use to invest directly?

### Types of Platforms

There are broadly, two types of platforms providing US investing services to Indians:

* An Indian brokerage or platform having a tie-up with an international or US based-brokerage like Drivewealth or Saxo.
* An international brokerage.

The international brokerages generally require a minimum account value (total value of investments held with that broker - similar to minimum relationship value used by banks) and charge higher brokerage.

On the other hand, Indian platforms generally don't require a minimum account value and generally have lower brokerage charges (some even offer zero brokerage).

### Common Platforms

Some of the common platforms are:

* [Vested](https://vested.co.in) (US-headquartered Indian platform)
* [Winvesta](https://www.winvesta.in) (Indian platform)
* [IndMoney](https://www.indmoney.com) (Indian platform)
* [Groww](https://groww.in/explore/us-stocks) (Indian platform)
* [ICICI Direct](https://web.archive.org/web/20200530175329/http://content.icicidirect.com/mailimages/Overseas_Trading_Presentation.pdf) (Indian brokerage)
* [HDFC Securities](https://www.hdfcsec.com/globalinvesting) (Indian brokerage)
* [Interactive Brokers](https://www.interactivebrokers.co.in/en/home.php) (International brokerage)
* [Charles Schwab](https://international.schwab.com) (International brokerage)

Things like fees/charges, features and range of stocks available for investment vary from broker to broker and keeps changing over time.

For more reading, one can refer to the following [reddit thread](https://www.reddit.com/r/IndiaInvestments/comments/lpefwk/us_investing_options_for_indians_personal/) for a recent discussion on some of the popular options.

## What are the tax implications of investing via Indian mutual funds?

India-domiciled mutual funds and ETFs holding more than 35% of their overall portfolio in foreign stocks are taxed similar to debt mutual funds and provide indexation benefits on long term capital gains after three years.

If held for less than three years, gains are added to your overall income and taxed at your income tax slab rate. If held for more than three years, gains are taxed at a flat rate of 20% after indexation.

While Indian equity funds have an advantage over international equity funds when it comes to taxation, taxation shouldn't be the most important criteria if one is investing for long term and one is investing according to one's asset allocation. Also, one must keep in mind that tax rules can change over time.

## What are the tax implications of investing in US stocks directly?

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.


See these links for more details on tax on US stocks: [Galactic Advisors](https://web.archive.org/web/20210222152046/https://www.thegalacticadvisors.com/post/investing-in-us-stocks), [ClearTax](https://web.archive.org/web/20210312135055/https://cleartax.in/s/tax-implications-indian-residents-investing-us-stock-markets)

## Are there any limits on how much one can invest?

Yes. Under the RBI's liberalised remittance scheme (LRS), resident Indians can invest up to USD 250,000 (~INR 1.8cr based on $1=₹72.5) 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

## What documents does one need?

Generally, one needs a proof of ID (PAN card) and proof of address (All bills and statements must be within the last 3 months and must have your name on it) and the process is usually paperless. However, this process may vary from provider to provider and one should check with the respective support team.

## 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. This ranges from USD 11 - 35.

## What else should one keep in mind while investing directly?

The Indian securities market regulator SEBI doesn't have any effective oversight of these entities. Hence, as a cursory check, investors should verify that the brokerage they are investing through is registered with the SEC, FINRA and SIPC which are the primary US regulatory bodies.

* [FINRA broker check](https://brokercheck.finra.org/)
* [SIPC list of members](https://www.sipc.org/list-of-members/)

## What else should one keep in mind while investing via mutual funds?

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%` for the direct plan.


But we also see that the underlying fund's [prospectus](https://web.archive.org/web/20210309202613/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 at least:
`0.61 + 0.70 = 1.31%`

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