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Investing in US stocks is become increasingly popular among Indian investors, especially the younger generation. Despite the Indian stock market’s impressive bull run over the past few years, many are drawn to the potential higher returns of prominent US stocks like Amazon, Tesla, and Nvidia. Unfortunately, many investment apps have high fees and complicated terms that can discourage people from using them. In this article, we will explore a low-cost and efficient way to invest in US stocks from India.

Why Invest in US Markets?

Here are four compelling reasons why you can consider investing in US stocks:

1. Diversification

Diversification is a fundamental investment strategy that involves spreading investments across various assets to reduce risk. When one asset class performs poorly, another may perform well, balancing your overall portfolio. For instance, when stock markets decline, commodities like gold often rise. The US and Indian markets have low correlation, meaning their performance is not closely tied. This lack of correlation opens opportunities for true diversification. If the Indian stock market underperforms, your US investments can potentially offset those losses.

2. Currency Depreciation

The performance of the Indian Rupee against the US dollar can significantly impact investment returns. For example, if you bought US dollars when the exchange rate was ₹70 and the rate increased to ₹84, your investment appreciates without any stock market gains. This currency strength can enhance your overall returns.

3. Lower Volatility

The US market is more mature and stable compared to the Indian market. This maturity results in lower daily volatility, making it a less risky investment option. However, do remember that no investment is entirely without risk!

4. Better Valuations

US stocks often have better valuations compared to Indian stocks. Price-to-earnings (P/E) ratios in the US are generally more favourable, providing more value for your investment. For example, many US-listed companies have lower P/E ratios than Indian companies, indicating better value potential.

To learn more about P/E ratio, explore this article: How to Analyse Debt & Valuation of a Company?

How to Start Investing in the US Stock Market from India?

Many investors may wonder how to begin their investment journey in US stocks with minimal capital. Here’s a straightforward approach:

Investing Through Mutual Funds

One of the most effective ways to invest in US tech stocks is through mutual funds, specifically those focused on the NASDAQ index. The NASDAQ is renowned for its tech-heavy listings, including major players like Apple, Amazon, and Nvidia.

Here are two mutual funds that are ideal options for investing in US markets:

1. Motilal Oswal NASDAQ 100 Fund of Fund

The Motilal Oswal NASDAQ 100 Fund of Fund is a popular choice for Indian investors. This fund invests in another mutual fund that directly targets NASDAQ-listed companies. Here are some key points:

CAGR Returns: The fund has delivered an impressive Compound Annual Growth Rate (CAGR) of around 25% over the last five years.
Expense Ratio: The expense ratio is relatively low, ensuring that you get more out of your investments.
Minimum Investment: You can start investing with as little as ₹500.
Performance: Over the last year, the fund has provided more than 30% returns, demonstrating the potential of US markets.

2. ICICI Prudential NASDAQ 100 Index Fund

This fund also invests in NASDAQ companies and offers similar benefits:

Returns: The fund has delivered a return of 29.21% over the last year.
Expense Ratio: The expense ratio is slightly higher at 0.52%, but still reasonable.
Portfolio: The fund invests in leading tech companies like Microsoft, Apple, Nvidia, and Amazon, in proportions that mirror the NASDAQ index.

Other Options to Invest in US Stocks

In addition to the NASDAQ-focused funds, you can consider the following options:

Motilal Oswal S&P 500 Index Fund: This fund invests in the S&P 500 index, which includes major US companies like Microsoft and Amazon. The investment ratios differ from those in NASDAQ funds, providing additional diversity.
Sector-Specific Funds: Explore funds that focus on specific sectors, such as technology or healthcare, to align with your investment strategy.

How Much to Invest?

While investing in US stocks can be beneficial, it’s essential to balance your portfolio. Moderation is key! A recommended strategy is to invest no more than 15-20% of your total portfolio in US stocks. This allocation provides diversification benefits while keeping the majority of your investments within familiar markets.

Investing too heavily in foreign markets can expose you to risks you may not fully understand. While major US tech companies show strong growth potential, diversification is essential to safeguard your investments. Balancing your portfolio with a mix of domestic and international assets can lead to more stable long-term growth.

Conclusion

Investing in US markets offers numerous benefits, from diversification to access to leading technology companies. However, it’s vital to approach this opportunity with caution. Mutual funds provide a transparent and efficient means to invest, minimising risks associated with direct stock purchases.

As you embark on your investment journey, remember to conduct thorough research and consider your risk tolerance. The US market presents a wealth of opportunities, but informed decisions are crucial for success. Share this guide with fellow investors to help them navigate the complexities of investing in US stocks.

Stay informed, stay diversified, and enjoy the journey of investing in the global market!

Over the past month, all major global indices have been technically quite weak. Stock markets around the world are witnessing a fall as soon as there are rumors of negative cues. The fear of lockdowns amidst the exponential rise in Covid-19 cases and an increase in US Treasury Bond yield continues to create a state of panic. These factors have often led to major sell-offs in the market.

Last week, another crisis posed a threat to stock markets. Archegos Capital, a New York-based wealth management firm, has collapsed. Many prominent banks are facing heavy losses due to this incident. Let us understand the details surrounding this collapse and the impact it had on the stock market. There is a lot of financial jargon coming your way, and we will try to make it as clear as possible.

Brief Profile – Archegos Capital

Archegos Capital Management is a family office that primarily invests in the US, Chinese, and Japanese stock markets. A family office is a private entity that provides investment or wealth management services for ultra-high net worth investors. They serve very wealthy families, generally those with over $100 million (~Rs 735 crore) in investable assets.

Archegos Capital was founded by Bill Hwang, a former equity analyst at US-based Tiger Management (which no longer exists). In 2012, he was found guilty of insider trading and was charged by the Securities and Exchange Commission (SEC). Bill Hwang and the firms he managed had to pay $44 million to settle all charges. He was also forced to stay away from the investment advisory business. Thus, Hwang converted his firms into a family office. A point to be noted is that family offices are outside the regulatory scrutiny of the SEC. Most of their information or transactions are not available in the public domain.

The Collapse of Archegos Capital

Last week, Archegos Capital was forced into a fire sale of securities worth ~$20 billion (~Rs 1.46 lakh crore) after some of its portfolio stocks witnessed a significant fall. A fire sale refers to selling assets or securities at a very low price. Some of the prominent stocks in the firm’s portfolio included ViacomCBS, Discovery Communications, Baidu Inc., GSX Techedu, and Tencent Holdings. The company had huge exposure to these particular stocks due to swaps.

What are Swaps and Leverage?

Swaps are a kind of derivative instrument that can be traded over-the-counter (OTC) amongst large institutional investors. Such trades do not have to be reported to the public. It allows investors to take huge positions in securities without having to pay large sums of money upfront. For investing in swaps, financial institutions often borrow millions of dollars from banks— known as leverage. So, the underlying securities were the publicly traded shares (ViacomCBS, GSX Techedu, etc) and swaps gave Archegos Capital the benefit of leverage. Bill Hwang had made huge bets on these stocks and was hoping they would perform well.

He used leverage, which is money borrowed from banks (or even brokers), for buying these shares. Prominent banks agreed to fund these transactions as they believed in Hwang’s expertise in managing money. Moreover, the lenders would also receive a lot of money through commissions.

When such transactions are conducted, a portion of stocks that a firm intends to buy are often pledged in the form of collateral with banks. More importantly, the investor has to immediately bring in additional money as collateral as soon as the stock prices begin to fall. This is because a decline in share prices leads to a fall in the value of margin with the broker/bank. This demand for additional money or collateral is referred to as margin calls, which are triggered when the value of shares falls below a certain requirement.

What Happened to Archegos?

Swaps often increase the size of investments in stocks by enabling investors to infuse only a limited amount of money. However, when the underlying investments show a decline in value, banks and brokers usually sell the shares they hold on behalf of their clients. If a client is unable to pay when a margin call is made, lenders begin to sell the shares to recover what is owed to them. If the stock prices continue to fall, these lenders would start to incur huge losses.

This is exactly what had happened to Archegos Capital and its lenders. There was a large-scale selling of ViacomCBS, Baidu, and Tencent shares— which led to the stock prices falling sharply. ViacomCBS fell 23% last Wednesday and another 30% on Thursday, as analysts downgraded the stock on account of being overvalued. The shares of other companies Hwang had bet on, such as GSX Techedu (a Chinese ed-tech company) and RLX Technologies, also started falling.

To cover their losses, Archegos Capital initiated a fire sale of the stocks in their portfolio. However, the firm was unable to meet its lenders’ calls for more collateral to secure equity swap trades they had partly financed. Most of the firm’s prime brokers such as Goldman Sachs and Morgan Stanley quickly offloaded the stock in all of Archego’s investments. As shares of the companies mentioned above were being sold or simply dumped, its stock price started falling heavily.

The Impact

As per reports, two major lenders are likely to face severe losses due to their exposure to Archegos Capital. This is because the value of the collateral they were holding in the form of stocks was losing value very quickly. Japan’s largest investment bank, Nomura Holdings, is likely to face a loss of up to $2 billion. Switzerland-based Credit Suisse said a default on margin calls by Archegos could be “highly significant and material” to its first-quarter (Q1 CY21) results. As per sources, Credit Suisse’s losses are likely to cross $4 billion.

The stocks of all major banking and financial services firms that had exposure to Archego Capital saw a huge fall on Monday (March 29). Morgan Stanley shares fell 2.6% and Goldman Sachs Group took a hit of 1.7%. The shares of Nomura posted a record one-day decline of 16.3%. Credit Suisse shares dropped 14%, its biggest fall in a year.

Conclusion

Now you know how Bill Hwang and his firm, Archegos Capital Management, caused a mini-crash in the markets over the past week. It clearly shows the risk posed by large firms that are able to operate outside the purview of strong regulators. As mentioned before, family offices do not have to register with the Securities and Exchange Commission, nor do they have to disclose transactions. They continue to deal in securities worth billions based on rash decisions and greed. If such trades are left unchecked, it could lead to major systemic risks. The collapse of Archegos has made entities realise the importance of limits or strong regulations on swaps and leverages.