While Indian benchmark indices BSE Sensex and NSE Nifty 50 have rallied more than US headline indices S&P 500 and Nasdaq 100 in the last one year, US markets have been less volatile than Indian markets over the long run, providing investors with more stability, Viram Shah, Co-founder & CEO, Vested Finance, told Harshita Tyagi of FinancialExpress.com. Additionally, the Indian rupee has depreciated by over 50% against the US dollar in the last decade, which has favored Indian investors, adding to their overall returns, he added. Here are edited excerpts from the interview.
In the last one year while Sensex and Nifty have rallied 20%, S&P 500, Nasdaq 100 have gone up 15%. As US Fed rate hike, inflation fears have dampened market sentiments, should Indians invest in US stocks?
Whether it is India or the US, we encourage investors to stay invested for the long term. Over the last decade, the Indian markets and US markets have given comparable returns. Investors need to understand that the markets are likely to go through cycles and that long-term investing is key.
How are US markets different from Indian share markets, and what are the risks involved for Indian investors when they decide to invest in US stocks?
Over the long run, US markets have been less volatile than Indian markets. Indian markets have seen greater volatility with bigger swings. In the last 15 years, Dow Jones standard deviation has been around 18% and S&P around 18% as well. In comparison, the Nifty standard deviation in the last 15 years has been around 22%. In addition to that, there is a currency risk involved when investing in a foreign market such as the US. When you invest in US stocks, INR is converted into USD, and when you sell US stock, USD is converted into INR.
Since the rupee has depreciated by over 50% against the dollar in the last decade this has favored Indian investors, adding to their overall returns. Currency depreciation is dependent on several critical factors like Inflation, Trade deficit, Balance of Payments, etc. However, to determine how much it will depreciate, at a high-level we can look at the inflation differential. Historically, in the USA, the inflation hovers around 2%, and in India, it is about 6%. Hence, the currency typically depreciates by that difference of roughly 4%. These are historical figures. If the inflation scenario changes, then the currency will react accordingly. It is likely that the inflation differential continues over the next few years.
Other risks like liquidity risks can be minimized by investing in high-quality stocks.
Aside from FAANGM stocks and Tesla, which stocks are seeing traction from Indian investors?
Apart from FAANGM stocks and Tesla, some of the other stocks that were among the top 10 most popular stocks on the Vested platform (on April 8, 2022) are Nvidia, Shopify, UiPath, and Coinbase.
What are some sectors, themes that Indians can look at while investing overseas in the US market?
Some of the interesting themes in the US are – Artificial Intelligence (companies like Nvidia, Google, Microsoft), Electric Mobility (this includes not only electric car manufacturers but also battery and charging infrastructure providers), CRISPR, the gene editing technology and Cloud Computing.
How much should investors ideally part towards global equities/ETF in their portfolio for geographical diversification?
This would depend on a lot of factors like the investor’s risk appetite, age, and so on. However, an investor may have up to 15-20% of their portfolio in global equities for the purpose of diversification
What are the tax implications of investing in American stocks for Indian investors?
Indian investors need to be aware of tax implications when investing in the US markets. Capital gains are taxed in India but not in the US. The rate of taxation depends on the holding period of the investment, and it can either be short-term or long-term capital gains. Here is how it works.
Short term
Threshold: Less than 24 months for stocks, less than 36 months for ETFs
Rate: As per your income tax slab
Long term
Threshold: More than 24 months when investing in US stocks and more than 36 months when investing in ETFs
Rate: 20% with indexation benefits
Unlike investment gains, dividends will be taxed in the US at a flat rate of 25%. This means that the company paying the dividend will deduct the 25% taxes before distributing the remaining 75% to the investor. However, taxes paid in the US are made available as foreign tax credit and can be used to offset your income tax liability in India. However, please consult your tax advisor before making any investment decisions for yourself.
