Investment in International or US Stocks | Explained in 7 Points
Want to invest in International stocks like Apple, Google or Amazon? Let see how to invest in international stocks, cost incurred, its taxation etc. in this article. Traditional diversification of portfolio in locally available instruments restricts opportunities. So many a times we may want to include these foreign stocks in our portfolio in order to attain global diversification.
How To Invest in International Stocks?
1. Why to Invest in International Stocks?
- We typically recommend, as a retail investor, you should build your portfolio on consumption driven theme. This portfolio can be sustainable over longer horizon.
- We use many products of the international stocks like Apple, Google, Microsoft, Motorola, Samsung, Amazon, Netflix etc. These products are a part of our day-to-day life.
- Thus, by investing in these international stocks, we can take an advantage of their high growth potential and earnings visibility over the long-term.
- Investing in foreign stocks help you to diversify your portfolio. You can attain global diversification through these stocks.
- Also, by investing in the foreign stocks, one can avoid single country, single asset exposure, which will help to reduce overall portfolio risk.
2. How to Invest?
- How can an Indian retail investor buy foreign stocks?
- One can invest in international stocks through well-known brokerages in India, which are having a high credibility and can offer a safeguard to your investments
- Many domestic companies are having tie ups with foreign brokerages houses which include :
3. What is the Cost?
- There are 2 types of costs incurred while investing in foreign stocks :
- Transaction Cost
- It depends on the amount of investment. Here, brokerages fix the cost for different countries.
- The details are given in below diagram. Here, minimum cost is up to $15 i.e. in INR terms around Rs.1000 per transaction. While Maximum up to $50 means Rs.3,500 trade cost will incur. So, the amount of investment matters a lot because the transaction cost is linked with the amount invested.
- Exchange Rate Cost (Currency Conversion Ratio)
- When an Indian investor intends to invest in international stocks, he/she will invest in Rupees. While the brokerage houses will invest in those stocks in the respective currency of that stock.
- Thus, these banks / brokerage houses will charge you an exchange rate cost, popularly known as Currency Conversion Ratio, for converting the Rupee into the Foreign Currency. So, brokers will charge you about 1-2% currency conversion rate while buying as well as selling the international stocks. Please refer below diagram.
4. How Much Maximum Amount One Can Invest?
- Indian investors are allowed to invest up to $2.5 Lakh per annum in international stocks under the Reserve Bank of India’s (RBI) Liberalised Remittance Scheme (LRS). For RBI’s master direction about LRS scheme, please refer : Liberalised Remittance Scheme
- Assuming the Exchange Rate : $1 = Rs.70, the Maximum amount that can be invested is Rs.1.75 Cr.
- You can transfer money to the foreign broker partner through your Indian bank under LRS.
- Capital gains made through foreign stocks and funds are taxed in the same manner as debt mutual funds in India.
- Short-term Capital Gains :
- Gains within 3-year holding period are treated as short-term and are taxed at your slab rate.
- Thus, short-term capital gains will get added to your total gross income and its taxation will be according to your tax slab.
- Long-term Capital Gains :
- Gains after 3-year holding period are treated as long-term and are taxed at 20%, with the benefit of indexation.
- What is Indexation Benefit?
- You can add the inflation cost for 3 years to your cost of acquisition.
- For example, You have invested Rs.100 and you got capital gains of Rs.30 after 3 years. For these 3 years, there was a inflation of 5%.
- Thus, according to the Indexation benefit, you can add this inflation cost for 3 years (5+5+5) = Rs.15 to your original cost (Rs.100). So, at the end of 3 years, your cost of acquisition of the investment will become Rs.115 (Rs.100 + Rs.15)
- Here, Taxable Capital Gains will be Rs.15 (Rs.130 – Rs.115). That is you have to pay tax on Rs.15 and not Rs.30 as a result of Indexation benefit.
- Dividends are taxed at your slab rate. But if tax is deducted at source, you can claim benefit under the Double Taxation Avoidance Agreement (DTAAs) between India and the deductor country.
- One should remember to disclose the value of your foreign assets and income each year in Schedule FA of your income tax return.
6. Alternative Option
- Is there any alternative for the Direct Investment in International Stocks?
- Yes. You can opt for international funds. A number of mutual funds in India have launched many International funds, which invest in foreign stocks and give retail investors a global exposure.
- Comparing 2 Options : Direct stock investment in international stocks vs Investing through International funds
- Investing through International funds :
- One can invest through mutual funds registered in India, which invests abroad. Indian mutual funds investing abroad through their international funds or Feeder funds, typically, charge an expense ratio of 0.5-2.5% per annum.
- Here, you do not need to pay any other commission charges or currency conversion fees.
- Direct stock investment in international stocks :
- Buying foreign stocks directly is more expensive than investing in mutual funds.
- Currency conversion and transaction charges will take a 1-2% cut and then you will have to pay brokerage.
- Investing through International funds :
- If you do not want to pick stocks directly, you can simply pick a US-based ETF like S&P 500 ETF.
7. What Retail Investors Should Do?
- In case of retail investors, where portfolio is smaller, then rather than going for direct stock investments, investors should opt for international funds.
- As we have discussed above, these international funds have a good global exposure with a number of best foreign stocks.
- It is not going matter much even if retail investors not include international funds in their portfolios.
- Foreign investors are seeing Indian equity market much better on account of a great future growth potential and earnings visibility of Indian businesses.
- A high demographic dividend is a key to the growth of an Indian economy, which is mainly consumption driven.
- The recent under performance of many Midcap and Smallcap stocks, may also offer a good returns after the revival of the cyclical downturn.
- Thus, Indian Equity Market is more attractive in terms of Risk-Reward Ratio over the longer horizon.
- As a retail investor, you should invest in international stocks only if you understand the business of these securities.
- The index funds of the foreign Indices can also need a thorough search, which foreign securities do these foreign indices – NASDAQ 100, S&P 500 include, also their exposure etc.
- Otherwise having the global diversification by investing through International funds will be a good alternative for the retail investors.
Frequently Asked Questions (FAQs)
One can invest in international stocks through well-known brokerages in India, which are having a high credibility and can offer a safeguard to your investments. Many domestic companies are having tie ups with foreign brokerages houses which include : HDFC securities Ltd is having a Tie up with Stockal, New York, ICICI Direct Securities and Axis Securities have Tie up with Saxo Bank, Denmark.
Capital gains made through foreign stocks and funds are taxed in the same manner as debt mutual funds in India.
You can add the inflation cost for 3 years to your cost of acquisition. For example, You have invested Rs.100 and you got capital gains of Rs.30 after 3 years. For these 3 years, there was a inflation of 5%.
Thus, according to the Indexation benefit, you can add this inflation cost for 3 years (5+5+5) = Rs.15 to your original cost (Rs.100). So, at the end of 3 years, your cost of acquisition of the investment will become Rs.115 (Rs.100 + Rs.15). Here, Taxable Capital Gains will be Rs.15 (Rs.130 – Rs.115). That is you have to pay tax on Rs.15 and not Rs.30 as a result of Indexation benefit.