By Trivesh D
Investing in US stocks from India
For the past ten years, the US market
The dream of pursuing opportunities outside India holds strong appeal. For various people, the dream has meant different things. Some see investing in foreign markets as nothing more than fancy marketing
US Market, a growing trend
The USA is home to the world’s nine largest publicly traded companies. The S&P 500’s sector composition has changed dramatically over the past 50 years. In recent years, investing in US stocks from India has become increasingly popular, attracting both seasoned investors and ordinary individuals. Technology and communication services accounted for 20% in 2005 but 40% by 2020. In contrast, these sectors accounted for only 15% of India’s Nifty 500 Index. Indian publicly traded technology companies account for less than 1% of the global technology sector market capitalization.
Another factor contributing to the popularity of US investments is the growth of digital infrastructure in India. This has led to the emergence of fintech firms building platforms for investing in the stock market outside of India.
India’s FDI in the United States capital market aggregated $3.7 billion in 2022, up 7.0% from 2021. Over the long run, the US stock market has consistently outperformed the Indian stock market. The year-to-date performance of the S&P 500 and NASDAQ 100 indices highlights the potential for growth in the US market. Although the US Federal Reserve’s rate hikes aim to curb inflation, the Treasury yield is currently ranging between 4.20% and 4.30%, below its earlier peaks of nearly 5%.
Investment, an opportunity
India’s 3% share in global market capitalization is overshadowed by the US’s 50%. The US stock market offers a wider variety of investment opportunities. Also, investments beyond the domestic market can act as a safeguard against sudden stock market crashes triggered by factors like budgets, elections, or natural disasters.
In the realm of investments, exploring opportunities beyond the familiar territory of the Indian stock market can unlock new potential for growth. One significant development in the Indian investment landscape is the setting up of feeder funds by mutual funds to invest in the US market, particularly those that focus on the S&P 500.
These funds offer Indian investors a window into the dynamic and growth-oriented US equity market, providing a chance to tap into the performance of the largest publicly traded companies in the United States. The S&P 500 is a well-established benchmark for the US stock market with a long history of strong performance, making it an attractive avenue for investment.
Residents of India seeking to diversify their portfolios beyond the domestic market can explore investment opportunities through the International Financial Services Centre (IFSC), located in Gift City, Gujarat
Furthermore, Indian residents can invest in foreign stocks through the international stock exchange established in the IFSC. Entities like India International Exchange (IFSC) Limited (India INX) and NSE International Exchange (NSE IFSC) provide a platform for investing abroad.
Funds of Funds also play a crucial role in building a foreign portfolio for Indians. These funds provide a diversified portfolio of foreign investments, which is beneficial in the long term as different geographies tend to show varying performance across different calendar years.
The US stocks offer diversification and potentially lower risk. One of the marquee advantages of investments in the US is the option to buy fractional shares, which implies Indians can now participate in higher-priced stocks without burning a large hole in their pockets. It is obvious, that the US market is massive, boasting eight times the size of India’s, providing broader investment options.
The value of your investment can be amplified by the potential appreciation of the US dollar against the rupee. Over the past 20 years, the Indian currency has depreciated by over 70% against the USD. If you look at the past seven years, the US dollar has risen by 28.6% compared to the rupee, with the exchange rate jumping from Rs 64.26 in 2017 to Rs 2.89 today (as of March 13, 2024). This means that even if the stock price remains constant, a strengthening dollar can increase the rupee value of your investment.
Now, by investing in US stocks, you benefit from both the stock’s value and the dollar’s value, which can be appreciated over time, enhancing your investment. For instance, if you had invested Rs 1 lakh in the S&P 500 index seven years ago, your investment would be worth around Rs 2.5 lakh today, considering just the dollar’s appreciation.
The disadvantages
The US market is like a fancy casino. The potential for a big win is there, but the house always has an edge. Don’t get caught up solely in the hype; invest cautiously and with proper research.
International investing involves higher charges compared to domestic investments. Account charges, brokerage, currency conversion charges, and other charges can hammer your profits. Factors like currency fluctuations, market volatility, and geopolitical factors can be major factors to consider too.
However, it is important to note that investing outside of India remains expensive, and there is a need for changes in banking regulations to facilitate more trade and simplify FEMA regulations. Trading in the US market can be significantly improved by the reduction of these charges.
In addition, it’s essential to remember that all markets tend to experience fluctuations, and hence asset allocation in the portfolio should not be changed based on short-term returns.
Ultimately, investing in the US stock market can be a valuable opportunity for Indian investors looking to diversify their portfolios and potentially earn long-term returns.
(Author is COO of Tradejini)
