Investing in US vs India as a NRI

In the midst of India’s booming economy, NRIs are presented with a compelling choice — should they invest in their home country or continue investing in the USA, where they currently reside? There are several factors that influence this decision such as asset class options, rate of return, exchange rate conversion, taxation, future country of residence, geographical diversification and of course your goals. In this blog post, we’ll dissect the key factors that NRIs need to consider, providing a simplified framework for making an informed decision.

1. Asset Class: While NRIs can invest in various asset classes in India and US such as equity market, real estate, gold, startups and many more, let’s begin by comparing the BSE index in India with the S&P 500 in the US, focusing on equity markets as a representative asset class. This comparison sets the stage for evaluating investment options in both countries.
2. Rate of Return: Analyzing the historical returns of both markets over the past three decades reveals that the BSE has outperformed the S&P 500. India’s economic reforms in the early ’90s have contributed to its robust market performance, making a compelling case for investment in India. Since 1990, S&P 500 (US stock market index) has returned 8.21% annually and BSE Index has returned 14.32%
3. Exchange Rate: Despite India’s strong market performance, the depreciating Indian rupee poses a challenge and the weakens the argument for investing in India as the dollar strengthens, especially if you are looking to repatriate the returns(gains) back to US. $1 was equal to ₹17 in 1990 and it is ₹83.12 as of Jan 2024, which means the rupee has deprecated around 4.8% annually since 1990.
4. Taxation: Both countries tax capital gains (i.e. gains from your investment) as per respective country’s taxation policies. In India, long term capital gains (anything realized beyond 365 days) is 10% and short term capital gains (gain realized in less than 365 days) is taxed at 15%. In US, this can vary between 0–20% depending on the income bracket.

Case Study

Give the above factors, let’s walk through a journey of three Indians: Through the stories of Uday, Nirav, and Mohan, all of whom who immigrated from India to USA in 1990. We illustrate the financial outcomes of different investment decisions. The case study emphasizes the impact of currency conversion, taxation, and residency decisions on returns.

Purely from a financial returns perspective, Swades Mohan who invested in India market gained the most — the reason is as discussed is BSE has outperformed S&P 500 during this period and he never had to convert the gains to dollars as he never returned back to US (hence the exchange rate as of 2023 did not impact him). However, Nirav who invested in India and then repatriated the money back to US and hence his returns were lower than Mohan’s due to dollar appreciation against rupee but still gained more (8.4%) than Uday who invested in only S&P 500 (7.4%). Based on this case study, if you are planning to stay in the US, does it make sense to Invest in India for the additional 1%? Our answer would be Yes for 3 reasons

• 1% annual increase over 33 years accounts for 351% in absolute return, so it is a significant amount.
• US dollar in general has weekend overall in the post COVID-world (since 2020) and western economies have struggled in the last few years with regard to GDP growth compared to India’s GDP growth.
• Economist project India’s economy would grow stronger in this decade hence the difference in returns (even after repatriation ) could be more than 1% in this decade.

If you are convinced about investing in India but do not comfortable moving the money to Indian bank account, opening a demant account and then investing, we have a solution and can follow our 4th friend Patel, who invests in India focused ETF in NYSE stock market (in the US). There are various ETFs such as iShares India 50 ETF (INDY) which you can invest using US brokerage account (e.g. Robinhood, Fidelity, E-Trade, Schwab) of your choice. While this is not the same as direct participation in Indian stock market, this is very close. These ETFs invest in popular Indian stocks e.g. Reliance industries, HDFC, Infosys, Airtel etc. These have high expense ratio ( basically fees ranging 0.69% to 0.89%) compared to Vanguard S&P 500 ETF or other similar ETF which is in the range of 0.03% to 0.08% and typically returns slightly lower in returns compared equivalent ETF in Indian stock market Many of these ETF came into existence after 2008 and hence we cannot to apple to apple comparison from 1990, however if we compared number for last 10 years(since 2013) — INDY that tracks NIFTY 50 index in NYSE has returned 9.2%, compared to investing in NIFTY 50 in BSE (India)would have returned 12%. The difference in return is mainly because of the exchange rate conversion.

Conclusion: If you are planning to return to India, investing in India by opening a NRO , demat, brokerage account would be smart approach. However, if you are uncertain to return to India it might be still a smart approach to invest to get India exposure for a portion of your investments to get better returns and geographical diversification. You do not need to go through process of NRO, demat, brokerage account in India if you are not comfortable(we will create a separate post on exact steps to invest in India via Indian bank , demat, brokerage accounts) but rather follow the strategy Mr Patel employed i.e. investing via India focused ETF to test the waters and then based on your experience in 1–2 years you could change it based on your situation and market conditions.

Disclaimer: The material presented in this blog is intended solely for informational purposes and should not be construed as financial advice. It aims to provide general insights and knowledge, without customization to your specific financial circumstances. It is highly advisable to seek the guidance of a qualified financial advisor or professional before making any financial decisions. The content in this blog may not consider individual circumstances, and any reliance on it should be exercised with your own discretion.