If you want to invest in US markets from India, you can do that, using two methods. The first one is in the form of direct investments (in the form of equities). The other is indirect (in the form of mutual funds and ETFs). Let's take a closer look at these two approaches.
Direct investments in the markets of the United States
Direct investments include opening an overseas trading account with a local broker who has a tie-up with stockbrokers in the United States or opening an overseas trading account with a foreign broker who has a presence in India. Domestic brokers have tie-ups with brokers in the US and function as middlemen in completing deals in the former. Keep in mind that depending on the brokerage business, there may be limits on the number of trades that may be done or prohibitions on investing in particular investment vehicles.
Due to the dollar-rupee exchange value, trading in US markets can be prohibitively expensive for an Indian retail investor. Many investors cannot afford even one share. A Tesla share is currently trading at $194.86 dollars, which when converted in Indian rupees, is 15,920.97 rupees. Thankfully, there are ways to buy a fraction of a stock. A fractional share is a portion of a whole stock that may be exchanged just like a full stock.
Investments made indirectly in US markets
There are two types of mutual funds that invest in foreign markets. The first is a fund of funds, which are local mutual funds that invest in international mutual funds, and the second is a fund of stocks, which are local mutual funds that invest in international equities. Mutual funds that invest in overseas funds typically have higher fee ratios. In the case of a fund of funds, in addition to the management charge for the Indian fund, there is a management fee for the underlying foreign fund.
Let's move on to ETFs. ETFs, or Exchange Traded Funds, are similar to mutual funds in that they are essentially a collection of various equities that are traded under one fund, but unlike mutual funds, ETFs are traded on exchanges with real-time pricing, much like stocks. ETFs can also provide exposure to certain sectors by investing in an ETF that follows a specific sector, such as healthcare or energy.
It should be noted that the mutual fund method may include certain regulatory difficulties. According to the Reserve Bank of India's mandate, all Indian mutual funds registered with the Securities and Exchange Board of India (SEBI) are able to invest in overseas markets up to a ceiling of $7 billion, with a limit of $1 billion for investments in international ETFs. Because these businesses' overseas investments had nearly hit the $7 billion level in January 2022, any new investments in international equities were halted.
Keep in mind the RBI's requirements for the Liberalised Remittance Scheme (LRS), which allows an Indian resident to invest up to $250,000 each year without any special permission.
What are the various fees associated with investing in US stocks?
Tax is collected at the source
Under the RBI's Liberalized Remittance Scheme, all remittances over Rs 7 lakh are subject to a 5% TCS (Tax Collected at Source). This only applies to amounts more than Rs 7 lakh, not the whole amount.
When a person submits an income tax return, the TCS can be claimed as a refund.
Dividend and capital gains taxes
Dividends are taxed at a rate of 25% in the United States for Indian nationals. Because of the Double Tax Avoidance Agreement (DTAA), the investor can claim credit for taxes paid overseas, avoiding paying tax on the same income twice.
In the United States, there is no capital gains tax on your assets. However, in India, you must pay capital gains tax.
Charges at the Bank
The majority of institutions impose foreign exchange conversion and transfer fees. A one-time account setup fee may also apply.
Brokerage Fees Brokerages impose a fee for the purchase and sale of stocks.
Currency Exchange Rate
The currency rate at the time of purchase or withdrawal can have an influence on the expenses and quantity of units issued.