Should You Invest in USA Stocks From India?

So, you are mighty chuffed that you have investments in equity mutual funds, some in a Gold ETF and a debt fund too. You think you are on top of all this investment planning. Just then, your financial advisor tells you to invest in USA stocks.
Did you also get a salescall recommending investments in US stocks? It seems to have become a fad of late.
Let us look at the pros and cons here. We will figure whether it is a popular notion or makes actual sense to invest in the US from India.

Fair warning: this will be a long post. It will also feature numbers aplenty.

Further disclaimer, this article is about investing from an index perspective. If you are looking to invest in specific US stocks, it is about the fundamentals and analyzing a company. It is not about $ over Rs. In this article, we will be looking at the indices to draw a broader conclusion

The terms I hear most often when discussing investing in US equities are:
i. market performance, ii $ appreciation. iii. diversification and iv. Booming tech stocks (FAANG is a term you might have heard).
I will add to the mix v. Index funds and finally vi. Taxes.

Market Performance:

A slight detour before we go back to the main story:
For reference we need to keep in mind the period 2000 to 2002
These were the worst 3 consecutive years for markets in our living memory. For those of us who did not see the ‘great depression’.
The first dot com wave crashed in 2000 leading to a general dip in markets. The 9/11 World Trade Centre attacks led to a fall in the markets in 2001. In 2002 corporate scams such as Enron / Anderson, Worldcom led to a further drop in US stocks. Each of these incidents affected the Indian market as well.

With a good perspective on history, we can have a better understanding of the past and present, and thus a clear vision of the future

Carlos Slim Helu

Why is this important?

An analysis which starts in the year 2003 looks very different from an analysis with 1999 as a base.
The S&P 500 closed the year 1999 at 1427 and then rocked by these three bad years, ended 2002 at 879. If you had been unlucky to invest 1 lac rupees at the end of 1999 you would have 62K at the end of 2002.
While the Nifty 50 did not suffer as much and started turning around a little earlier. 1 lac invested in the Nifty 50 in 1999 Dec would be worth 78K by Dec 2002.
In general, we should be sceptical of the analysis we are presented with and look at broader data sets to draw conclusions.
(2008 and 2020 Covid are bigger dips but 3 consecutive years of negative returns trump these)

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Market Performance:

Let us look at how the Nifty 50 has fared compared to the S&P500 and the Nasdaq over the last 10, 20, 30 years.
I am using Jan ’21 as the anchor for this comparison.
Here is what the data looks like.

It is interesting to note that the Nifty 50 has given better returns over 20 and 30 years than the US Indices. Even in the last 10 years, the returns are comparable looking at where we are right now (Aug ’21).
So, if we consider market returns only, then US indices don’t seem to give better returns than the Nifty 50.

Here comes the $ angle

Why then would we look at the S&P 500 at all, if the Nifty gives us better returns?
What we compared above was pure market returns, we did not take currency into account at all.
If you bring the $ into the equation something very interesting happens. Below is how the $ has fared compared to the rupee.

Since 1991 the $ started going up compared to the Re. This is when the Indian economy opened. This growth has accelerated in recent times.
In Dec 1999, $1 was worth Rs. 43. In 2021 it is 74.5.

How does this impact you?

In addition to market returns, the S&P 500 also gives you currency appreciation. So, over a 20-year CAGR the S&P and Nasdaq indices add 2.3% to your returns and over the last 10 years, they add a whopping 4.7%.
When you add $ returns, you get 16% CAGR for the S&P500 over the last 10 years and 13.6% for Nasdaq. I have gone a little quant here and plotted a scenario. Comparing returns for an investment made at any time in the last 20 years.

Green: S&P500 showed better returns compared to the Nifty 50

Pink: Nifty 50 gave better returns.

Conclusion: it is only in the last 10 years that the S&P500 beats the Nifty 50.

Diversification

This is touted as the most important reason.
You want to invest across different assets that are not correlated with each other. If one of your investments drops, the others should not drop in synchronization.
We usually look at debt funds and Gold for this kind of diversification in asset allocation. These of course have lower returns. But, if you can get equity returns and diversification, then it would be something to write about.
Let us look at the data to conclude for ourselves.
Below are graphs depicting the Nifty 50, the S&P500 and the Nasdaq over the last 20 years.

Frankly, I fail to see the lack of correlation here as a lay observer. I am sure a mathematician might come up with a means to establish a lack of correlation, but not for me as an investor. I can see that the dips in 2002, 2003 and the crash of 2008 and then Covid in 2020 have an almost similar impact. The extent of impact might vary, yet the impact is there. If anything, the highs in the Nifty look higher than the two US indices. Of course, with WFH we see a spike in the Nasdaq but other than that I cannot spot a clear lack of correlation. To me, it looks like the markets are moving very much in synch.
Thus, diversity might not be the most important reason to invest in the US indices.

So, where does that leave us?

My conclusion is that it is currently worthwhile investing the US Indices over the Nifty 50.
The core assumptions: i. the $ will continue to appreciate compared to the Re. ii. American stocks will perform at least at par with Indian stocks

Investors would be well advised to keep an eye on the currency exchange rate and periodically test this strategy.

What about index funds mentioned above.

Well, the US stock market is much more evolved than the Indian one. One firm stands out, Vanguard. Vanguard has many low-cost index funds to choose from. Most popular among these are VOO – the entire S&P500 and the VT – a global stock index.
VT effectively gives you exposure to the entire world’s stocks.
So, if you are looking for diversification, best to hold all the stocks in the world.
Vanguard also has retirement target-date funds. These are funds where you choose a retirement target year. The fund will auto-balance your exposure between Equity and Bonds. Reducing volatility as you get closer to your retirement year. We do not have these options in India yet.
Conclusion: The opportunity to invest in Vanguard funds is enough reason to invest in the US.

FAANG?

The popular acronym FAANG stands for Facebook, Amazon, Apple, Netflix and Google.
These companies have had fantastical gains over the recent years. Thus benefiting from the growth of these companies is another reason to look at investing in the US.
Of course, if you invest in the indices, you will still benefit from these. You will also get the benefit of companies like Microsoft, Zoom etc. (note: Amazon is not part of Nasdaq)

How does one invest in the US from India?

Listing a few ways to do this here, there are others I am sure:

• You can open a trading account directly with Schwab or similar companies. You can invest directly through that account. Schwab has a minimum starting amount of $25,000.00

• They advertise 0 minimum balance and 0 fees

• You can open a ‘Global Invest’ account with HDFC Securities. The engine for this is Stockal Inc. There are no standing fees, there are transaction fees based on what you buy and/or sell. There are other similar service providers. You need to make sure that whichever service provider you go with will provide you with the options you want ex. index funds from Vanguard etc.

• If you are focused only on S&P500 and Nasdaq100 then you have a simpler local solution. Motilal Oswal has funds and an ETF featuring these two indices. You can invest locally in these two funds.

Anything to watch out for

Yes, exchange rates and taxes

Exchange rates:

If you are using either a Schwab account or the HDFC Global Invest, you will be ‘remitting’ money into the account.
You need to be aware of the exchange rate. You should shop around and make sure you get the best exchange rate for your remittance. Typically, you would be remitting a largish amount. You should therefore get a preferential rate. Most banks have standard published rates, but for large transfers, they will give a better deal. The same applies whenever you do the reverse as well. (Note: Even if you use HDFC Global Invest, you can use ICICI Bank or anyone else to transfer $s)

Taxman!

Of course, our good old friend the Taxman is never far. If you are remitting anything more than 7 lac rupees, then 5% (of the excess) will be withheld as tax. This can be offset against your income tax. This is a new regulation introduced in 2020.
There is also capital gains tax. For taxation purposes, foreign stocks are treated as debt funds. There is 20% long term capital gains (with indexation) applicable if you sell the investment after 24 months. Short term capital gains will be taxed at your slab rate. This applies to the Motilal Oswal funds as well.

So, that should give a comprehensive view of investing in US stocks from India. Of course you should do your own analysis and figure if it works for you. You can also read here about the very basics and ten fundamentals of personal finance.

The hardest thing in the world to understand is the income tax.

Albert Einstein

Key Takeaways:

• Investing in the US stock market is a good option

• Look carefully at any data presented, the picture is not as rosy as some salespeople might make it up to be

• The $ appreciating vs the Re is what makes the investment option a lot more lucrative

• This has only happened in the last few years

• There are fund and index options in the USA which don’t exist in India yet. Such as Vanguard

• You can invest via Schwab, HDFC etc.

• Watch out for exchange rates and be aware of applicable taxes

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.