Investing in international stocks can help you build a financial corpus for your child’s education. Here’s how – Advisor Forbes INDIA

Every year, thousands of Indian students pack their bags to venture abroad for their studies. While 2020 was an outlier year due to Covid-19, the Ministry of Foreign Affairs estimated that more than seven lakh students studied abroad in 2019. These figures quickly rebounded in 2021. Even more telling are the data of the Reserve Bank of India on liberalisation. Remittance Program (LRS), which shows that Indians have sent a total of about $10 billion for education abroad in the past three years.

Historically, Indians have saved for education through investments in fixed deposits, gold, life insurance through Indian government-owned LICs, and real estate. These instruments can be bulky, illiquid, and provide less substantial returns for a purpose such as overseas higher education. Unlike education which is a definite event, the sale of real estate is not.

Additionally, investments in a currency (the 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 expenses have remained constant over 17 years. However, during the same period, the rupee lost its purchasing power in dollars, which led to a sharp increase in tuition fees.

It is important to note that most tuition fees do not remain constant. Countries like the United States grew by 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 study abroad are at a huge disadvantage.

Instead, Indians may consider investing in international equities, which can provide diversification in their broader portfolio and allow a parent or student to offset currency depreciation concerns.

Here we will take the example of investing in the american stock market.

Where to invest in the US market?

There are two types of US stock investments you should be aware of.

  • The first is stocks, which are publicly traded companies that trade on exchanges such as Nasdaq and NYSE. One of the most popular and successful sets of stocks is FAANG, which represents Facebook, Apple, Amazon, Netflix, and Google. Like any equity investment, you can acquire shares of these companies individually or through mutual fund.
  • The second type of equity investment is in a exchange traded fund (AND F). Although ETFs are also traded on exchanges, they are not single stocks, but several stocks put together. These baskets of stocks can track indices such as the S&P 500 or a sector such as technology or the automotive industry. For example, the SPDR S&P 500 ETF tracks the S&P 500 stock index and is one of the largest in the world.

Factors that may affect your investments in the US market

As with any investment, parents and students should be aware of certain factors that influence their choice of stock investments.

Risk, time horizon and historical performance are important factors to consider when constructing a portfolio. In an objective as delicate as education, parents must also take into account the age of their child. This is important because the degree of risk a parent can take will change as their child grows and gets closer to entering college.

For example, a parent with a two-year-old might consider investing in a small-cap ETF like the Invesco S&P SmallCap Value ETF with Momentum. Although they are relatively risky, their track record indicates a cumulative performance of more than 100% over the last five years (in dollars).

Conversely, a parent of a 22-year-old who wants to do their master’s degree in Canada within two years may not take as many risks. 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 to start?” Fortunately, Indians can open an American brokerage account from the comfort of their homes.

With the rapid adoption of technology, many private banks and fintech players have partnered with US brokers to provide online investments in thousands of international stocks. These mobile and web apps require you to go through a thorough know-your-customer (KYC) process. Once this is complete, you can 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 buy an individual share, you always have the option of buying a fraction of it, called a fractional share. Unfortunately, there is no direct debit system today, and therefore if you want to trade each month, you will have to go to one of these applications to buy or sell the shares each time .

Under LRS, Indians are allowed to remit up to $250,000 per annum for any foreign capital or current account transaction. This includes investments in international stock markets. Because merchant investments are a form of income generation, Indians are responsible for paying taxes even if these investments are overseas.

There are two types of taxes to be aware of:

  • Dividends: Dividend tax for Indian investors investing in the United States is 25%. These taxes will be deducted at source. For example, if you receive $100 in dividends, your after-deduction receipt 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 saves Indians from double taxation unless your tax bracket 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 capital gains tax exemptions in the United States. 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 chartered accountant.

Conclusion

Although the universe of US investments 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 growing in India. It is therefore even more important to assess which platform is best for you.

If you’re confident your child will study abroad, branching out into international stocks is especially crucial. This has the potential to amplify your returns for a goal that, let’s face it, can be very costly. And with technology leading the way, you can now think locally and invest globally.

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