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Betting on Wall Street

Access to US stocks has become simpler, but one must keep an eye on the cost aspect

Illustration by Raj Verma Illustration by Raj Verma

What has been the highlight for the stock market in 2020? Record retail participation in direct equities tops the list, but attraction to US equities comes a close second. The trend started in 2019, but picked up pace in 2020, especially after markets started recovering from the March crash.

Serial entrepreneur and veteran investor Pervez Hameed Sheikh was drawn to global stock investment for a variety of reasons. His four-decade-long experience in the domestic market was beginning to hit the saturation point. "I wanted to explore something new. I invested good three-four months in researching about ways to invest in the US market. Eventually I started my US stock journey with Interactive Brokers in October 2019. The process was cumbersome, but the brokerage guided me. When the market crash happened, I invested more money in US stocks."

Hameed is not alone. Just when first-time investors were entering the domestic equity market, some others were moving abroad. The reasons vary. Some want better diversification, some others sought dollar exposure (to hedge their investments against rupee depreciation) to ensure foreign education for their children or buy real estate in the US. The rest want to play themes unavailable in India such as EV revolution, internet and e-commerce stocks or bitcoin-linked stocks.

The ecosystem lapped up the increasing demand. A number of domestic brokerages such as ICICI Securities, HDFC Securities, Kotak Securities and provide a platform to get into US stocks. One can open an account directly with US-based brokerages such as Interactive Brokers and DriveWealth and investment advisors like Vested Finance and Stockal. Winvesta, a UK-based global investment platform, is another option.

"The primary advantages for clients to use Interactive Brokers directly are low costs, access to 135 global markets in 33 countries, and advanced trading technology," says Ankit Shah, Director, Interactive Brokers India.

Apart from streamlining the investment process that involves seamless transfer of funds from India to the US, these firms also give you an option of fraction investing. In fraction investing one buys a fraction of the share of the company if price of even a single share is unaffordable. For example, if a single share of a stock is worth $1000, you may invest just $10 to own 1 per cent of the share. "One may invest as low as $1 in US stocks; fraction of shares can be sold up to 8 decimal points," says Viram Shah, Co-Founder and CEO, Vested Finance.

American Pie

For Indian investors, global investment is restricted largely to the US markets. Apart from individual stocks, one can also invest in exchange-traded funds (ETFs) and corporate and government bonds. While the bouquet of products is large, the Indian retail money is largely going to FAANG (Facebook, Apple , Amazon, Netflix and Googles parent firm Alphabet) stocks and the likes of Microsoft, Tesla and Netflix. Tesla has been the most preferred and the best-performing stock in 2020. In rupee terms, it has gained 701 per cent in the US in the last one year. "Apple, Tesla, Microsoft, Google and Amazon are the most bought stocks on our platform," says Vijay Chandok, CEO, ICICI Securities.

On Winvesta's platform the investment ratio in FAANG versus other stocks stands at 1:3. "About 25 per cent of investment in Winvesta's platform is in FAANG stocks," says Swastik Nigam, Founder and CEO, Winvesta. "Besides FAANG, other popular stocks are TSLA (Tesla), NIO, MSFT (Microsoft), BRK (Berkshire Hathaway) and Advanced Micro Devices. Technology, electric mobility, and precious metals are the most popular sectors for investments. We are also seeing specific interest in Silver ETFs due to lack of domestic options for investing in the metal," he adds.

DIY Investing

These are early days for US stock investment. Industry players currently provide only a platform for accessing US stocks. They do not provide research or advice on which stocks to buy, sell or hold. There is hardly any research or data available on US stocks. Most investors mainly stick to known names, barring seasoned ones who having enough knowledge to hunt for quality opportunities.

"I use proprietary data. I have some programming skills too. I also use charting platforms. So a combination of these and a few spreadsheet formulas help me scan the entire market and get the best deals. I don't restrict myself to S&P-500, Nasdaq or Dow Jones stocks. I evolve strategies in a way that if I spot a risk I get out at the first sight of it," says Hameed.

Talking about HNI investors, Pramod Kumar, CIO, IIFL-ONE and Senior Managing Partner, IIFL Wealth, says very few clients want to build an international value portfolio or take a contrarian approach. "ETFs, MFs and stocks which are in the growth sectors and technology-based sectors would be the significant component of flows along with investments in broad-based indices such as the S&P 500."

Among IPOs last year, Snowflake, Airbnb, Unity Software, Lemonade and Palantir attracted huge interest from Indian investors. Indian investors cannot directly invest in IPOs. They can buy the shares after the stocks are listed. An increased interest was seen in vaccine-producing companies, Pfizer and Moderna, as well.

According to ICICI Securities, 800 types of US stocks and ETFs have been bought on its platform. "These include Virgin Galactic Holdings, Nikola Corp, Slack Technologies - ClA, Dominos Pizza, Nasdaq, Lockheed Martin, KKR & Co, Dropbox Inc-Class A, Twitter, Zoom Video Communications, Mcdonalds, Starbucks and Uber Technologies. Interestingly, we also have investors who bought Infosys, ICICI Bank and Wipro ADRs!" says Chandok.

Sky-high valuations

With more and more investors flocking to US stocks, sky-high valuations are being often ignored. The most preferred Tesla stock is trading at a premium. "Street analysts' ratings keep Tesla cautious. Only a third of analysts say it is a buy," says Nigam of Winvesta. FAANG stocks are also trading at steep valuations.

Chandok says this is the time to be a long-term player in the US markets instead of sitting on the fence. "One must consider US stocks for diversification, but don't take a short-term approach to it. Don't believe that in two-three months you'll earn returns. Be aware of where you are investing. Do your own research, and then make sound investment decisions," he adds.

Soon, Indian investors may get access to research reports on US stocks with commentaries on company profile, management, business operations, valuations and target price etc.

"Currently, we are not into research or advisory for US stocks. A lot of customers have approached us seeking research services. We are in discussion with Interactive Brokers for the same. We'll soon start providing research content to investors," says Chandok.

If research is not possible, you can also take exposure in ETFs. Moreover, there are readymade portfolios by the likes of Vested Finance and Stockal. All you have to do is put a lumpsum amount in the chosen portfolio and a portfolio manager will take care of your investment. Of course, there will be extra charges over and above the brokerage commission.

Managing Costs

The cost involved in US stock investment is an important factor. A couple of brokerages have made the process simpler. "The process has been simplified. We don't even ask for KYC, it's integrated. If you have an account with us, then you get to invest in the US market. All you have to do is transfer funds to your US trading account. The process is completely online for those having a bank account with ICICI, HDFC and IDFC," Prakarsh Gagdani, CEO, says.

But all this comes at a cost. Remitting money abroad has the following costs - bank processing fees and bank FX spread. "I had paid around Rs 1,100. But the good part is whether you transfer Rs 100 or Rs 1,000, charges will be the same," says Hameed.

Interestingly, even though online makes life simpler, transacting offline may help you land a better deal on bank charges. "Generally, the processing fee is negotiable with the bank in the offline method of transferring funds abroad and there are some banks like DBS who charge no or very low processing fees and have very competitive FX spreads. The range of the fee and spread can be as little as Rs 100/200 and 1-1.5 per cent, respectively, and as high as Rs 1,000 and 2-2.5 per cent on FX conversion," says Shah of Interactive Brokers.

Brokerage charge in case of US equities is high and a broker typically would charge you either a flat rate on per trade basis or a percentage on the total value traded. There could be one-time registration fee or periodic subscription charges. ICICI Securities has two subscription plans - Rs 999 and Rs 9,999 per annum. "Under Rs 999, you pay a brokerage of $2.99 per order, and under Rs 9,999, you pay 1 cent per share.

There are discount brokers such as 5paisa that do not charge you for delivery-based trades even in the US. With Winvesta, you have no account opening fee and a minimum monthly cost. "Once an investor signs up, we offer them 10 free transactions during the first month, and three free transactions each month, followed by a flat fee of $1," says Nigam of Winvesta.

"In order to boost return on US equities an individual should ideally choose a broker who chargers a low flat rate, so that the brokerage charge does not increase exponentially depending on the trade size," says Vineet Patawari, Co-founder & CEO of Elearnmarkets & StockEdge.

Further, a 5 per cent TCS (Tax Collected at Source) is levied on all remittances above Rs 7 lakh under LRS. This is applicable only on amount above Rs 7 lakh and not on the full amount. For example, if you remit Rs 9 lakh in a financial year, TCS is applicable only on Rs 2 lakh. This tax is withheld by the bank before the rest of the money moves overseas. If your tax liability is less than the TCS deducted, you can file income tax return and claim a refund.

"Although you will get the refund, the government will give it at an interest rate of say 6 per cent. In terms of opportunity cost it is a clear-cut first loss if you are investing money abroad. You lose out on the 10-15 per cent return that you may have otherwise earned on the reserved money," says Ghanisht Nagpal, Convener, Delhi Investors Association

Tax Structure

The capital gains that you earn on US stocks are only taxed in India. "If you sell US shares within a holding period of two years, you may realise short-term capital gains. These gains are added to your overall income and taxed according to your income tax bracket. If you sell US shares after holding them for two years or longer, you incur long-term capital gains. They are taxed at 20 per cent (plus applicable cess and surcharge)," says Archit Gupta, Founder and CEO, ClearTax.

The trouble comes with the dividends you earn on your investments. Dividend income is taxed both in the US and India. In the US, it is taxed at a flat rate of 25 per cent. This tax is withheld before you receive your dividends.

You also have to pay tax on these dividends in India, which is added to your taxable income and taxed according to your income tax slab in the financial year. "India and the US have a Double Taxation Avoidance Agreement (DTAA). You can offset the tax withheld in the US against your tax liability in India. For example, the 25 per cent tax you have paid on dividends in the US can be offset against income tax payable in India," says Gupta of Cleartax.

US stock investment is still at a nascent stage. Undoubtedly, a global exposure gives an edge, but do not go ahead blindly. Understand the cost structure well and do your stock research thoroughly before you take the plunge. "It is important to determine the size of investment before venturing into it. The cost of monitoring and transaction could be a constraint for small investors. The best way to invest is to partner with investors who have the requisite experience of overseas markets," says S. Ravi, Former Chairman, Bombay Stock Exchange, and Founder of accountancy firm Ravi Rajan & Co.

But even seasoned investors are facing a technical challenge investing in US stocks. Hameed says he earned decent returns on US stocks since 2019, but sold most of his holdings just ahead of the Presidential elections in November 2020 amid uncertainty around the political scenario. "Had it been India, I would have simply hedged my portfolio by taking positions in the derivatives market. But the government has prohibited trading in US derivatives. Since I could not hedge my US stock portfolio, I had to sell my holdings because I couldn't have taken a risk on higher valuations. The government should trust investors. It'll be in our interest if we get to trade in US derivatives," he adds.