Stop-Start US stock investing from India

Author’s note: Welcome to Episode 09. This post focuses on the US stock investing landscape in India, regulatory changes in the last 5 years, and the platform-level pursuit of users and a business model. Please reply to my email or comment here with your thoughts and new post ideas. I started another newsletter with my thoughts on figuring out life (Newsletter link here) if you would like to subscribe 🙃 

Overview

Indian public markets have come a long way with a compounded annual growth rate (CAGR) upwards of 16% (from January 2020 to mid November 2024). In the US, the NASDAQ composite has outperformed over a similar time period with 18.9% CAGR, S&P 500 with 15.1% CAGR and DJIA a relative laggard with 10.7% growth.

The performance of US stocks has not gone unnoticed even with the extraordinary prolonged bull market in the Indian bourses. Initially fueled by pandemic-era stimulus cheques, the vaccine-led recovery saw a dip with heightened inflation, rate hikes and the 2022 tech meltdown. The 2022-23 Big Tech layoffs, AI hype cycle, lower inflation, and commencement of a new cycle of rate-cuts has resuscitated the US bull market. 

The topsy-turvy half decade began with a once in a century pandemic and is ending with a second presidential term for Donald Trump (2017-2020 POTUS). It has been chaotic but largely rewarding for public market investors in India and USA. 

Indian investors have been spoiled for choice with US equity options including international security focused mutual funds, international ETF focused mutual funds and direct stock investments. Tesla and Nvidia hype cycles could be chased along with Adani and Zomato hype cycles. What’s not to love?!

Earlier, investing options were few and far and time was a constraint. In the last half-decade, Indian investors woke up and many began their journey from scratch. From Jan 2020 till now, the # of investor accounts grew from 8.5 crore to 21.65 crore. The assets under management (AUM) tripled from ₹22.2 lakh crore to ₹66.7 lakh crore.

In all this good news, Indian investors should have been able to diversify and invest in US stocks. They should have greatly benefited from the many investing platforms including Groww*, Fi Money, IndMoney, Vested and others that enable US stock investing. Right? Right?!

Regulation

In January 2022, SEBI asked mutual fund houses to stop fresh investments in overseas securities including US stocks to prevent them from breaching the $7 billion limit set for such investments. This limit was established in 2008, and in 2020 and 2021, SEBI intervened to lift the individual mutual fund house’s investing limit from $300 million to $1 billion. However, the overall $7 billion limit stays unchanged even as Indian and US markets have greatly grown, and # of investors has risen along with the AUM. For content, the Indian mutual fund industry's AUM is ₹67.26 lakh crore with overseas equity investments of ₹75,000 crore i.e. 1.1%. 

The regulator has been proactive. In June 2023, it advised mutual fund houses to allow fresh investments as the dip in US stock markets had opened up headroom for additional funds. In March 2024, it further asked mutual funds to stop accepting investments in overseas ETFs from April 2024 to prevent a breach of the $1 billion limit for such investments.

Beyond the constraints on investing in US equities through mutual funds, Indian investors could still leverage the Liberalized Remittance Scheme (LRS) to invest up to $250,000 in international financial securities. In fact, the restriction on mutual funds helped popularise US stock investment platforms as an alternative investment path.

These platforms were seen as clunky and necessitated manual fund transfers to enable US stock investments. The ability to purchase fractional US shares helped them democratise international market investing with a $1 investment the starting point for US market entry.

And then, 20% Tax Collected at Source (TCS) on foreign remittances including for international investments was announced in February 2023. Previously, 5% TCS was charged for international remittances beyond ₹7 lakh in a financial year, and it was now quadrupled, thereby serving as an opportunity cost for US stock market investors from India.

In July 2024, a new long-term capital gains (LTCG) tax rate of 12.5% applicable on international investments with a 2 year holding period was announced. This would apply without indexation benefits. Previously, investors would have to bear a 20% LTCG tax rate with a two year holding period and an indexation benefit. As an outcome, Indian investors will now shell out 37.5% lower taxes on their US stock LTCG but will simultaneously be affected by the removal of indexation benefit.

Cost of free is convoluted pricing

Initially, US stock investing apps enticed users with free or discounted brokerage rates and low/ nil account opening/ maintenance fees/ withdrawal fee. Nothing is free forever, unless it’s a Zero Interest Rate Phenomenon and then you should acquire users till you physically cannot.

Every company invariably reverts to the standard blueprint of free offerings or higher cashback or both for acquiring its first users. Companies never learn because users are enticed more by savings/ cashback vis a vis a superlative product experience. The bar on product quality can be higher but no-low pricing initially solves traction for sub-par products.

Once expenses add up along with negligible revenue on the P&L, companies panic and start charging for everything. If the offering is truly valuable, consumers grumble but they pay. If the offering is not life-changing, consumers grumble, find cheaper options and shift. All companies have to do is to find a sustainable pricing plan, hold onto it and promise users they won’t shut the business when private investors review monthly numbers or public markets ding them for a splintered focus. 

A sustainable business model and two coats of trust is all it takes to build a company. Similar to happy long-lasting relationships-- it’s just the small things in life 🙃🙃. 

Free eventually costs more. Groww* launched its US stock investing platform in September 2020 and announced its impending closure in January 2024. It charged zero fee for trades/ account opening/ account maintenance/ US fund transfer and a $9 discounted fee for user withdrawals.

It claimed that it was sunsetting the feature as users faced complications including in adding USD funds, high withdrawal fees, frequent downtimes, and delays in money settlement. This meant that users had to either fully liquidate portfolios or transfer stocks to another platform and liquidate fractional shares. Either way, users bear the cost of no-low pricing and the broken trust has a repercussion across the emerging industry.

Other leading US stock investing platforms include Vested Finance, INDmoney and the new entrant Fi Money. Vested offers a base/ premium subscription, charges brokerage for trades and a withdrawal fee. INDmoney charges include a % of the amount deposited in the US wallet, brokerage for trades and a withdrawal fee. Fi Money is presently free of these pesky charges till it presumably identifies this as a glaring expense item and no longer wants to attract moneyed users with the hook of free US stock investing(?!).

Conclusion

New users onboarded to the Indian markets will discover investing in US stocks and will deploy a % of their investable portfolio to hedge their bets. This is inevitable as they mature in their investing journey and stay invested through major dips that can hit their capital and confidence.

Trust in capital markets is important and a business model for US stock investing should help build sustainable investing platforms. Death by a thousand fee types should be killed but it will take time. Investors will have to vote with their $$ to instigate platform-level change and that does not happen overnight. Until then, expect to bear the quick commerce equivalent of platform fee/ order handling fee/ surge fee/ rain fee on US stock investing platforms. If they have none of these fees, these will come soon.

*Personal disclaimer: I invested through Groww’s feature till it was deprecated.

Arjun’s picks

• Read the earnest X chat section for Zomato CEO’s CoS hiring post 

• The Money Trap by Alok Sama. Softbank Vision Fund, Masa, Nikesh Arora, Sprint and Arm combine in a very well written chapter of the author’s life

• Google antitrust case: DOJ asks for Google to divest the Chrome browser as one of the remedies. Keep your eyes on this for precedents it may set

• Newsletter link here: started another newsletter this week with 5 minute essays about figuring out life. Please drop by and read one essay today 😃 

• Ep. 2 of the Omega Files: An Indian VC fund Blume Ventures takes us behind the scenes yet again.