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Every year, thousands of Indian students pack their bags to venture abroad for their studies. While 2020 was an aberrant year due to Covid-19, the Foreign Office estimated that more than seven lakh students studied abroad in 2019. These numbers rebounded quickly in 2021. Data from the Reserve Bank of India on liberalization are even more revealing. Remittance System (LRS), which shows Indians have paid a total of about $ 10 billion for education overseas over the past three years.
Historically, Indians have saved for education by investing in term deposits, gold, life insurance through Indian government-owned PFRs and real estate. These instruments can be lumpy, illiquid, and offer less substantial returns for a purpose such as higher education abroad. Unlike education which is a definite event, the sale of a property is not.
Additionally, investing in a currency (rupee) that has depreciated against the dollar can make saving more difficult. To understand why currency depreciation is such a critical factor to consider, let’s look at a simple example. In the table below, tuition and living costs have been held constant over 17 years. However, during the same period, the rupee lost its purchasing power in dollars, which resulted in a sharp increase in tuition fees.
It is important to note that most tuition fees do not stay constant. Countries like the United States have grown 4.4% year-on-year over the past 20 years. This means that Indians who invest in rupee assets as a method of saving for education abroad have a huge disadvantage.
Instead, Indians may consider investing in international stocks, which can provide diversification in their larger portfolio and allow a parent or student to offset concerns about the depreciation of the currency.
Here we will take the example of investing in the US stock market.
Where to invest in the American market?
There are two types of US equity investments that you should be aware of.
- The first concerns stocks, which are publicly traded companies traded on exchanges such as the Nasdaq and the NYSE. One of the most popular and successful stock sets is FAANG, which represents Facebook, Apple, Amazon, Netflix, and Google. Like any investment in stocks, you can buy stocks of these companies individually or through mutual funds.
- The second type of equity investment is in an exchange traded fund (ETF). Although ETFs are also traded on an exchange, they are not individual stocks but several stocks together. These baskets of stocks can track indices such as the S&P 500 or a sector such as technology or the auto industry. For example, the SPDR S&P 500 ETF tracks the S&P 500 stock market index and is one of the largest in the world.
Factors that may impact your investments in the US market
Like any investment, parents and students should be aware of certain factors that influence their choice of equity investments.
Risk, time horizon and historical performance are important factors to consider when building a portfolio. With a goal as delicate as education, parents must also weigh the age of their child. This is important because the level of risk a parent can assume will change as their child grows and gets closer to entering college.
For example, a parent with a two year old child might consider investing in a small cap ETF such as the Invesco S&P SmallCap Value with Momentum ETF. Although they are relatively risky, their track record indicates a cumulative performance of over 100% over the past five years (in dollars).
Conversely, a parent of a 22-year-old who wants to do a master’s degree in Canada within two years may not take as much risk. Instead, they can consider a mega-cap ETF with less volatility and standard deviation. It is best to consult a financial advisor to find out what is best for you.
How to invest in the American markets?
The next question naturally becomes: “How do I get started?” Fortunately, Indians can open an American brokerage account from the comfort of their own homes.
With the rapid adoption of technology, many private banks and fintech players have partnered with US brokers to invest online in thousands of international stocks. These mobile and web apps require you to go through a comprehensive Know Your Customer (KYC) process. Once this is done, you can proceed to open a US brokerage account and fund your account.
To fund your US account, it is necessary to use your local bank in India to remit these funds. Banks such as ICICI Bank, HDFC Bank, IDFC Bank, and Axis Bank support digital transfers, which means the whole process can be handled online.
Once the account is funded, you can officially start buying individual stocks. If you are unable to afford an individual share, there is always the option of purchasing a fraction of it, called a fraction of a share. Unfortunately, there is no automatic debit service today, and therefore, if you want to trade every month, you will need to go to one of these apps to buy or sell the shares each time.
Under the LRS, Indians are permitted to pay up to $ 250,000 per year for any foreign capital or current account transaction. This includes investments in international stock markets. Because market investments are a form of income generation, Indians are responsible for paying taxes even if those investments are overseas.
There are two types of taxes to be aware of:
- Dividends: The dividend tax for Indian investors investing in the United States is 25%. These taxes will be withheld at source. For example, if you receive $ 100 in dividends, your receipt after deduction will be $ 75. You don’t have to worry about whether you will have to pay any other taxes in India. India and the United States have signed a Double Taxation Avoidance Agreement (DTAA). This prevents Indians from double taxation unless your tax slab exceeds 25%.
- Capital gains tax: You will be asked to complete a W-8BEN form when opening the account. This form recognizes that you are a foreign investor earning income in the United States. It also allows you US capital gains tax exemptions. Instead, you will be responsible for paying short or long term capital gains tax in India depending on your investment horizon. For clarity, one can also consult a local accountant.
Final result
While the world of US investing may seem daunting at first, proper research can help you make an informed decision about which partner you want to work with. The number of banks and fintech companies offering international equity investments is increasing in India. Therefore, it is even more critical to assess which platform is best for you.
If you are confident that your child will be studying abroad, it is especially crucial to diversify into the international action space. This has the potential to boost your returns for a goal that, let’s face it, can be very expensive. And with technology in mind, you can now think local and invest globally.
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