You would have come across companies offering you free stocks of US-based companies. Should you invest globally? Does owning international stocks generate better returns or reduce overall risk? Let’s discuss.
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Buckle up, here we go!
I have never travelled outside India. But with the help of the internet, I keep learning about their markets, businesses and culture to fulfil my curiosity.
Over the years, I have observed tremendous growth in their markets, especially the tech businesses. And I always wanted to be a part of that growth. So how could I do that while sitting on my couch in India?
By investing my money in their markets. Our money doesn’t need a passport or visa to travel throughout the earth. So, I let my money fulfil my wishes. My money takes part in their growth and lets me experience the ups and downs of their markets. Interesting, right?
But does this lead to any other benefits? Yes.
Benefits of investing in international stocks:
1. Portfolio Diversification
You probably already know how essential diversification is to your investment portfolio. By spreading your money out among tens or hundreds of companies, you decrease the risk of losing all your money if one investment goes south.
Markets outside India don’t always rise and fall at the same time as the Indian domestic market. So owning pieces of both international and domestic equities can reduce volatility in your portfolio. It spreads out your risk to two or more markets than one.
Also, the tech stocks index NASDAQ 100 has given better returns over the years.
2. Currency Depreciation
We all have seen how our Indian rupee has fallen in value against the US dollars, euros, and other currencies. We also spoke about this here.
As the Indian government wants to increase exports, we don’t see them and the RBI working to increase the value of the Indian currency other than stabilising it.
So can we use this situation to our advantage? Yes.
When the US dollar strengthens against Indian Rupee, our US investments can provide a hedge. This means if the US dollar becomes stronger against our currency, your portfolio of US stocks will have a better performance.
How can you invest in international stocks?
First, if you want to invest globally, our recommendation is to limit yourself to the US markets as a beginner.
Because investing in the US market is smoother than in other markets. More information and help are available to invest in the US than others. Take specialised professional advice before investing in other markets.
There are two ways you can gain investment exposure to the US market.
Direct Investment (Individual Stocks)
Let’s say you want to buy shares of companies like Apple or Tesla. You need to open a trading account with an Indian broker who has partnered with a US broker or with a US broker who has a presence in India.
You can also invest in 25 selected US companies through the newly launched NSE IFSC platform. They increased the number of companies available to invest in from just 8 companies when it started.
Indirect Investment (ETF & mutual funds)
We spoke about what ETF is and its use case in India here. In the US, the ETF market is more mature. A lot of active ETFs are also available. So you can invest in US ETFs or Indian mutual funds that invest in ETFs in the US market.
Things to consider before investing in US markets:
1. Risk profile
Many believe that the volatility of the US equity market is lower than the Indian equity market. Even then, you should know the risk. Each sector or company poses its own risk. Only invest if your portfolio can handle such a risk.
Investing in the US company’s stocks through an Indian or US broker comes with its own charges. They collect brokerage fees and transaction charges. And even your bank will charge you to transfer money to an international bank.
Many brokers also charge a minimum amount when you withdraw money and transfer it back to your Indian bank account.
Be aware of such charges and invest only if you are sure that your returns make sense after deducting these charges.
Similar to Indian equity taxation, US equity also has two taxes based on when you sell your shares. If you sell the share within 24 months, they consider it to be short term, and tax your gains based on your tax slab.
If you sell after 24 months, it is long term, and they will charge your gains at 20% plus surcharges.
These taxes are to be paid in India and not in the US.
But if you receive dividends from your investments, a tax of 25% is collected at the source. At the end of the financial year, you can show this 25% tax paid amount to reduce your tax payment in India, as they wouldn’t want you to pay tax twice.
In the end, we would like to suggest that you can start investing small in ETF or index funds tracking the Nasdaq 100 or S&P 500. Create a SIP and invest in the long-term. Make global equity investments that offer you more diversification and less correlation as a part of your overall portfolio.
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