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How fractional investing brings big-ticket US stocks within your reach

Moneycontrol logo Moneycontrol 17-02-2021 Venkatasubramanian K
a city street: How fractional investing brings big-ticket US stocks within your reach © Suyash Maheshwari How fractional investing brings big-ticket US stocks within your reach

Most of us generally buy a ‘full’ share of a company listed on the exchanges. But how do you buy one share of MRF, one of India’s largest tyre manufacturers, which costs you Rs 89,293.10? Or Honeywell Automation at Rs 44,140.40, or even Page Industries (Rs 28,844.95 a share)?

Unless these companies are held by a mutual fund scheme in which you can invest as little as Rs 500, there is no other alternative to holding such expensive shares unless you have a large amount of surplus cash. But if you wish to invest overseas, you can hold a portion of a company’s equity share.

Indian investors can own a slice of technology majors such as Apple and Facebook by committing just $1 (Rs 73). This is possible thanks to the fractional investing concept being offered by online advisories and investment platforms.

Ease in buying high-priced shares

These entities allow ordinary investors to buy fractional shares of companies whose stocks are priced at hefty rates in Indian rupee (INR) terms. Indian regulations, however, do not allow fractional investing/ownership in Indian stocks as of now.

Shares of technology behemoths are incredibly expensive in absolute terms. While Amazon is currently trading at around $3,305 per share (about Rs 2.41 lakh), Alphabet’s scrip costs nearly $2,075 (around Rs 1.51 lakh).

Fractional investing is the ability to buy less than one share. It works well for high-priced shares of firms such as Amazon, Google and Berkshire Hathaway. Globalise, a London-based investment advisory-cum-broking firm, and Stockal, an online platform that enables investing in global stock markets are among those that are taking Indian investors to the high-priced world of US stocks through fractional investing.

“Some of the US stocks that have done well are quite expensive. Fractional investing makes investing in US stocks all the more accessible for average Indian investors,” says Viraj Nanda, co-founder and CEO, Globalise. “Investors with smaller amounts of money can buy regardless of the price of the stock,” he says

Stocks of some of the companies engaged in new-age businesses have had a good run on the US bourses. An investment of $10,000 made in Tesla six months ago (August 2020) is now worth about $30,000, while that in Alphabet would now be valued at $13,865.

You can buy a fraction of Amazon share for $5 or $50 or $500. Investors get an account statement on a regular basis.

How much can one invest?

Under the RBI’s ‘Liberalised Remittance Scheme (LRS)’ guidelines, an Indian resident can invest up to $2.50 lakh (Rs 1.75 crore) per year in overseas markets. This can be done without seeking approval from the RBI. Investment advisories do not charge a fee for account opening.

Base plans, however, charge $0.025 (Rs 2) per trade. Investment advisories and brokerages offer access to over 4000 stocks, ETFs (exchange traded funds) and ADRs (American Depository Receipts) listed on the New York Stock Exchange and the NASDAQ.

Why US markets?

The US accounts for 66 percent of the MSCI global index, and US companies generate over 40 percent of their revenue from global activities, according to online platforms that enable fractional investing in US markets. Exposure to US stocks is a good proxy for global exposure, say financial planners. Further, US markets have a long track record, are deep in terms of liquidity, have strong corporate governance and are home to best-in-class companies across multiple industries, say advisors. “A 15 percent-20 percent diversification into global markets that have a lower correlation to Indian markets works well for investors,” says Srikanth Bhagavat, managing director, Hexagon Capital Advisors. “You should go for global investing for diversification, rather than just returns,” he says.

How does direct investing in US stocks work?

Upon signing in, the investor has to complete an online KYC (know your customer) process. After this, investors would be able to open their trading account. For verification (as per US regulations), investors have to answer a series of suitability questions and upload two documents—a proof for ‘Date of Birth’ (scanned copy of PAN card and a proof of address (utility bill, bank statement, or Aadhaar card). The process can be completed within minutes and accounts are approved within one or two business days.

Once the approvals are in place, investors can fund his/her overseas brokerage account via their Indian bank account under the LRS of the RBI. In simple words, you need to buy US dollars (or any other foreign currency) from your bank and transfer these dollars to your brokerage account. This money transfer is subject to your LRS limits.

Thereafter, the user can start investing in US-listed stocks, ETFs, pre-built strategies and theme-based portfolios through the platform offered by advisories/brokerages. The buying and selling process only requires a few clicks from initialisation to order completion. Orders are executed in real-time when the US markets are open.

Investors can withdraw funds whenever they want to. The advisory/brokerage collects users’ Indian bank details and work with their partner bank in the US to transfer the money, in INR, directly into the beneficiary’s Indian bank account.

What is the downside?

Sending money abroad through LRS is quite expensive now. Banks charge anywhere between Rs 500-Rs 1500 per transaction now, say officials with online platforms that offer overseas investing options. Further, banks also take up to 1.5 percent as charges on the value of the US dollars that they remit in an account. So, you would end up paying Rs 74-75 when the US dollar is quoting at Rs 73.

Some experts believe that average investors should avoid deploying money directly in shares due to the risks involved. “Investors should avoid direct exposure to individual (global) stocks,” says Suresh Sadagopan, founder, Ladder7 Financial Advisories. “A mutual fund is also a form of fractional investing. So, it is better to go through the MF route while investing in overseas markets,” he says.

How are international shares taxed?

Investors have to pay both long-term capital gains (LTCG) as well as short-term capital gains (STCG) in India for profitable exits in overseas stock markets. If an international investment is held for more than 24 months and then sold on a profitable basis, it is considered LTCG.

LTCG is taxable at 20 percent plus applicable surcharge/cess, but investors can claim indexation benefit. STCG applies for profits made in less than 24 months. They are included in the investor’s total income and taxed at applicable IT slab rates.

Dividends in the US get taxed at a flat rate of 25 percent. But the US and India have a double taxation avoidance agreement (DTAA), which allows taxpayers to offset taxes already paid in the US. The 25 percent tax that is paid in the US is made available as ‘Foreign Tax Credit’ and can be used to offset income tax payable in India. Advisories/brokerages help track the cost of investments and profits made for tax reporting at the end of the India fiscal year.

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