How to invest in gold through ETFs available in the US stock market?

How to invest in gold through ETFs available in the US stock market?
by Vested Team 25/08/2020

If you are an Indian investor looking to invest in gold or silver, you can do so through the Indian market by investing in digital gold products or mutual funds. But if you are interested in investing in gold through the US stock market, you can do so through ETFs.

Before we dive into the different gold or silver ETFs, let’s briefly discuss why the prices of these two precious metals have rallied in recent months. Prices for gold and silver have rallied in recent months.

This is due to several factors:

Fear of debasement: Debasement occurs when a currency loses its value. Due to the unprecedented stimulus package (e.g. money printing) by both the US and EU in response to the COVID-19 induced recession, many are concerned that the real value of the global reserve currencies (USD and Euro) will decline. Typically, the real value of currency goes down when there is an increased supply of the currency. These stimulus packages have the effect of increasing the money supply. As you can see in Figure 1 below, the supply of USD (M3) has jumped by 16% since the US introduced different phases of its stimulus package – this is the fastest increase observed over a four month period dating back to 1960.



Figure 1: Supply of money (M3, which include cash, checking deposits, savings, large time deposits, institutional money market funds, short-term repurchase agreements and larger liquid assets). Organization for Economic Co-operation and Development, M3 for the United States, retrieved from FRED

The last time the US released a large stimulus package (to counter the great recession of 2007 to 2009), gold rallied (Figure 2).
vested-blog-3-graph2
 

Figure 2: Returns of Gold ETF (GLD) vs. S&P 500

Fear of inflation: However, while debasement in many cases leads to inflation, this is not always the case as we have witnessed over the past decade. Inflation will follow the increased money supply only when the demand for goods and services have returned to their previous level (despite the increased money supply, if no one is spending the cash, prices of goods and services will not increase). Therefore, it is likely that in the near term (the next 1 to 2 years), the level of inflation is likely to be low/moderate. The recovery of demand for goods and services will lead to a full economic recovery, and that is unlikely to occur until we have a vaccine at a global level.

Imbalance in supply and demand: In the case of silver, about 50% of global silver demand is from the car and solar industries. With the global lockdown, demand from these sectors weakened initially, leading to mines closing, and causing supply restrictions. However, the prospect of industrial reopening, combined with investors’ rush to buy silver and increased demand from electronics and solar panels manufacturers have contributed to the recent rally.

How to invest in gold and silver through the ETFs available through the US stock market

 

 

You can gain exposure to these precious metals by ETF investing through the US stock market via two methods:
Invest in ETFs that are backed by physical gold/silver

 

 

  • Invest in ETFs that are backed by physical gold/silver
  • Invest in ETFs that invest in companies that produce gold/silver


Investing in gold and silver through ETFs

One of the most cost effective ways to invest in gold is through ETFs that are backed by physical gold. By investing through gold ETFs, investors do not have to incur the buying, storing and insuring of physical gold. Two of the largest gold ETFs are GLD (SPDR® Gold Shares) and IAU (iShares Gold Trust).

Table 1: GLD vs. IAU

 

SPDR Gold Shares (GLD)

iShares Gold Trust (IAU)

Net Assets

US$66.9 billion

US$25.91 billion

Average Volume

11,916,834

24,502,210

Inception Date

2004-11-18

2005-01-21

Net Expense Ratio

0.40%

0.25%

Note: As of August 1st 2020

Similar to the aforementioned gold ETFs, there are also ETFs that offer fractional ownership of physical silver through the ETF structure. The largest ETF of this kind is SLV (iShares® Silver Trust).

Table 2: SLV ETF

 

iShares Silver Trust (SLV)

Net Assets

US$8.88 billion

Average Volume

36,907,459

Inception Date

2006-04-21

Net Expense Ratio

0.50%

Note: As of August 1st 2020

Investing in gold and silver through mining ETFs

An alternative method of investing in gold and silver is to invest in companies that mine these precious metals. There are several ETFs that have made this process simple. These ETFs invest a majority of their funds in common stocks and depository receipts of companies involved in either the gold or silver mining industry.

Typically, investments in these ETFs have a higher beta than investing in physically-backed ETFs directly because investments in these companies can be affected by the individual performance of companies within the ETF (and not just the demand of the underlying gold or silver). This means that they have higher volatilities but also potentially higher returns.

Figure 3 shows the performance of YTD returns between Gold Miners ETF (GDX) vs. Gold backed ETF (GLD) vs. S&P 500. When you look at the difference between the Gold Miners ETF compared to the Gold backed ETF, the Miners ETF exhibits much higher volatility; it declines much larger during between March to April, but has rebounded higher as the price of gold increased.

vested-blog-3-graph3

Figure 3: Year to date returns of Gold Miners ETF (GDX) vs. Gold backed ETF (GLD) vs. S&P 500

Although we use GDX as an example of Gold Miners ETF, there are several ETFs that are focused on investing in companies involved in mining and other aspects of gold production. Two of the largest are VanEck Vectors Gold Miners ETF (GDX) and VanEck Vectors Junior Gold Miners ETF (GDXJ). These two have different constituents, and therefore may have differing return profiles. See Table 3 to see how they compare.

Table 3: GDX vs. GDXJ

 

VanEck Vectors Gold Miners (GDX)

VanEck Vectors Junior Gold Miners (GDXJ)

Net Assets

US$15.96 billion

US$5.23 billion

Average Volume

32,635,298

9,916,121

Inception Date

2006-05-16

2009-11-10

Net Expense Ratio

0.53%

0.54%

Note: As of August 1st, 2020

Similar to gold, you can also invest in ETFs that are focused on companies actively engaged in the silver mining industry. The two largest in terms of net assets are Global X Silver Miners ETF (SIL) and iShares Silver Trust (SLVP).

Table 4: SIL vs. SLVP

 

Global X Silver Miners ETF (SIL)

iShares MSCI Global Silver Miners (SLVP)

Net Assets

US$655.59 million

US$145.61 million

Average Volume

713,984

294,121

Inception Date

2010-04-19

2012-01-31

Net Expense Ratio

0.66%

0.39%

Note: As of August 1st 2020

Note: Before making an investment decision, you should carefully consider the risk factors and other information included in the prospectus of each fund.

The content is originally posted at Vested.co.in

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How taxes will work for investors in India when investing in the US?

How taxes will work for investors in India when investing in the US?
by Vested Team 25/08/2020

Our aim is to make investing in the US stock market simple for investors from India for which we have now partnered with Vested to give our customers more options to diversify their portfolio. 

For investors in India, there are two types of taxation events when you have returns from your investments in US stocks:

Tax on investment gains:

This tax is payable if you sell your investments at a higher price than when you buy them, and is calculated as the sale price minus purchase price. You will be taxed in India for this gain. You will not be taxed in the US. The amount of taxes you have to pay in India, at the end of the fiscal year, depends on how long you hold the investment:

  1. To qualify as a long term capital asset, the period of holding in case of shares of a foreign company is over 24 months. Thus if you hold the investment for longer than 24 months → the gain will be taxed at a long term capital gains tax rate of 20% (plus the applicable surcharges and cess fees).

  2. Whereas, if you hold the investment for less than 24 months → the gain qualifies as short-term capital gains and will be taxed as normal income in India. For example, if you buy one Google stock at a share price of $1000 and you sell your share less than 24 months later for $1100, you will be taxed in India for the $100 gain you have made. Taxation is based on the tax bracket that you fall under according to your income level.


Tax on dividend:

Unlike investment gain, dividend will be taxed in the US at a flat rate of 25%. This means that the company paying the dividend will subtract the 25% taxes before distributing the remaining 75% to the investor. For example, if Microsoft gives an investor $100 of dividend, it will withhold $25 as tax, and will give the investor the post tax dividend of $75. Subsequently, this post tax dividend is included as taxable income in India (as normal income).

Fortunately, US and India have a Double Taxation Avoidance Agreement (DTAA), which allows taxpayers to offset income tax already paid in the US. The 25% tax you already paid in the US is made available as Foreign Tax Credit and can be used to offset your income tax payable in India.

The content is originally posted at Vested.

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5 Stocks to BUY in 2020

5 Stocks to BUY in 2020
01/09/2020

The Indian stock market continued to rally and gave a positive return for the straight fourth year in the CY2019. For year 2019, Nifty and Sensex climbed 11.5% and 13.8% respectively. The indices touched the historic closing high of 12271.80 (Nifty) and 41681.54 (Sensex) despite the slowdown in the economy. Slashing of corporate tax, the six years high FII flows of Rs1 lakh crore in 2019, significant progress on bankruptcy resolutions, and Govt.’s efforts to address liquidity issues of Real Estate and Infrastructure sector guided the market performance in 2019. On the international front, easing trade war tensions also acted as positive for the Indian markets.

Going forward, market performance will be driven by benefits of low corporate tax, macro- economic tailwinds, implementation of Government policies, interest rate scenario and good monsoon. Hence, based on historical performance, management outlook and earnings growth, we have picked the below mentioned stocks that are likely to offer decent returns in 2020.

Hero Motocorp (Hero)

CMP: Rs2,349
Target Price: Rs3100 (1-year)
Upside: 32%

Hero is the largest 2W company in India. The company currently has ~52% share in the Indian domestic motorcycle market and ~37% share in the domestic 2W market (including scooters). We expect revenue CAGR of over FY19-21E as retail demand has started improving across rural and urban markets from second half of September 19. We expect recovery in rural demand to continue following a good monsoon and expectations of a strong Rabi crop output. Additionally, the recent launches of Xtreme and XPulse are gaining good market share and are expected to do well hereon too. We expect margins to remain under pressure over FY19-21E due to higher promotional expenses related with BS IV inventory. With volume growth in FY21E expected, margins may see an up move on better operating leverage. We expect PAT CAGR of over FY19-21E. The stock trades at 13.3x FY21E EPS

Year

Net Sales (Rs Cr)

OPM (%)

Net Profit (Rs Cr)

EPS (Rs)

PE (x)

FY19

33,650

0.0%

3,384

169.5

13.9

FY20E

31,540

0.0%

3,232

161.8

14.5

FY21E

37,023

0.0%

3,514

176.0

13.3

Source: 5paisa research

ICICI Bank

CMP: Rs525
Target Price: Rs 570 (1-year)
Upside: 8%

ICICI Bank is India’s second-largest private bank with a loan book size of Rs5.9tn in FY19. It enjoyed a ~6.0% market share in system loans as of FY18. ICICI Bank is looking to tap the growth opportunity, through market-share gains across products, fast credit delivery to retail and SME customers by using data analytics and rule-based engines for pre-approved loan offerings, relentless focus on cross-sell to affluent/own customers, partnership with Fintechs to add innovative products, adoption of an eco-system based approach with targeted product offerings, and making relationship managers responsible for cross-selling liabilities and fees. Strong growth opportunity, potential reduction in credit costs and improving profitability would keep stock performance robust, in our view. The stock trades at 2.5x P/BV FY21E.

Year

Net Sales (Rs Cr)

Net Profit (Rs Cr)

EPS (Rs)

PBV (x)

FY19

27,010

3,360

5.2

3.1

FY20E

33,030

9,890

15.3

2.9

FY21E

37,980

18,570

28.8

2.5

Source: 5Paisa Research

Larsen & Toubro (L&T)

CMP: Rs1,291 
Target Price: Rs1,778 (1-year)
Upside:38%

L&T is India’s largest engineering and construction company and is well placed to leverage the uptick in the investment cycle. We believe that the government’s push on infrastructure and widening base of mid-size orders will aid faster execution. L&T's strong order book of Rs303,222cr (2.8x TTM sales) at Q2FY20-end provides healthy revenue visibility for the next 2 years. Further, monetisation of non-core assets will help release capital and improve return ratios. We estimate the company to report revenue CAGR of 19% over FY19-21E with a flat EBITDA margin. PAT CAGR is estimated at 17% over the same period. ROE has been continuously improving from 9.9% in FY16 to 15.8% in H1FY20. Management is confident of achieving ROE target of 18% by FY21E. The stock trades at 14.2x FY21E EPS

Year

Net Sales (Rs cr)

OPM (%)

PAT (Rs cr)

EPS (Rs)

PE (x)

FY19

50,569

19.9%

8779

63.2

20.3

FY20E

56,815

20.2%

9,773

70.3

17.6

FY21E

61,894

20.4%

10723

77.1

14.2

Source: 5Paisa Research

SBI Life Insurance (SBI Life)

CMP: Rs984
Target Price: Rs1180 (1-year)
Upside: 20%

SBI Life is India’s largest private life insurer, with an overall market share of 12.2% on a retail APE basis. The company has a product mix of participating, non-participating and linked policies, with the mix skewed towards linked products. Unlike peers, for which growth is largely driven by one or two product segments, SBI Life has delivered industry leading growth across protection, non-par annuity and guaranteed return products as well as ULIPs, defying the weak sentiment in the capital markets. We believe that it could continue to surprise the street positively via resilient growth in uncertain times driven by a strong distribution franchise and mass customer base. We expect 17.3%/25% EV/VNB CAGR over FY19-21E. The stock trades at 3.2x FY21E P/EV.

Year

New Premuim Income

VNB

VNB margin (%)

PAT

P/EV

FY19

32,890

1,720

17.7%

1,326

4.4

FY20E

43,076

2,169

19.0%

1,659

3.8

FY21E

52,550

2,695

20.0%

2,102

3.2

Source: 5Paisa Research

Quess Corp

CMP: Rs512
Target Price: Rs740 (1-year)
Upside: 44%

Quess Corp is one of India’s leading integrated providers of business services. Quess’ service and product offerings are currently grouped under five operating segments i.e. People and Services, Technology, Facility Management, Industrials and Internet. We expect revenue CAGR of 21.1% over FY19-21E on account of strong outlook in staffing business, consistent client additions and entrance into new service platforms. The company enjoys huge advantage of scale in general staffing in India (largest in India with 240,000 associates & ~41% of group sales). Further, the blend of recently acquired Allsec and Conneqt will make Quess a challenging play in BPM platforms. We expect margins to improve by 110bps over the same period on account of presence in specialized staffing and focus on ramping up high growth sector viz. Facility Management. Expansion of Allsec in newer geographies will also support the margin growth.  We project PAT CAGR of 23.7% over FY19-21E. The stock is currently trading at 19.1x FY21EPS.

Year

Revenue (Rs cr)

OPM (%)

Net Profit (Rs cr)

EPS (Rs)

PE (x)

FY19

8,527

5.4

256

17.5

29.2

FY20E

10,706

6.4

287

19.7

26.0

FY21E

12,495

6.5

392

26.8

19.1

Source: 5Paisa Research

Research Disclaimer
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Gas Utilities Sector: A best play in the longer-term

Gas Utilities Sector: A best play in the longer-term
by Nikita Bhoota 07/09/2020

The Covid 19 pandemic will disrupt the performance of gas utilities companies in the short term but it is a positive play from a longer-term point of view. The growth drivers for gas consumption (stable regulations, improving last-mile connectivity, ease of imports, etc.) are intact. Thus, the gas utilities sector looks positive in general. City Gas Distribution (CGDs) are the best plays in the sector given superior revenue models (unregulated, attractive RoE, earnings growth, etc.).

Covid only defers, does not derail the macro theme:

The aspects necessary for improving Natural Gas (NG) consumption in India are still intact, regardless of the Covid 19-disruption; a stable regulatory system, expansion of pipeline network, last-mile connectivity, ease of gas imports and favourable economics vs. alternate fuels, etc, along with successful implementation of reforms in pipeline tariffs, would go a long way in increasing gas sales in India. Weak outlook on LNG pricing should augur well, at a time when economic activity remains weak. Thus, Covid 19-disruption only defers the growth theme, but does not derail it.

CGDs still best plays:

Gas sector looks positive, but CGD looks more attractive, as their revenue models are unregulated; they can generate superior cash flows and return ratios for a sustained period; and even when competition is introduced, due to their rich learning curve and through investment in technology, the operating matrix can remain unaffected.

Key developments to facilitate gas-sector growth in India:

Some of the key developments in this sector are

  • Change in priority allocation: In 2014, the government of India (GoI) made CGD companies its top priority for allocation of cheap domestic gas for Compressed natural gas (CNG) and domestic Piped Natural Gas (PNG), to enable faster penetration.
  • Changes in pipeline tariffs in 2018 to attract more investments: In order to attract more investments in creating an all-India gas grid, PNGRB revised its pipeline tariff regulations (peak capacity utilisation lowered, from 100% to 75%), allowing better returns for pipeline companies.
  • Focus on last-mile connectivity: To boost the gas economy, Petroleum and Natural Gas Regulatory Board (PNGRB) is focussing on improving last-mile connectivity and, accordingly, has expedited auction of CGD licences. In the last 18 months, 136 new licences have been awarded (1.5x existing areas). PNGRB is also planning an 11th round, shortly. Further, the Regulator has revised bid parameters, to have a greater emphasis on infra rollout.
  • Facilitating market development: A gas Exchange is planned for bringing market-driven pricing in the energy market of India. An Exchange would not only bring in more transparency to pricing, but also create a spot market to meet gas requirements.

Recommended Stocks

Our preference among CGDs is Gujarat Gas/ Indraprastha Gas (IGL) /Mahanagar Gas (MGL).

IGL is hopeful of a quick ramp-up in volumes, with easing of restrictions. In Apr-20, volumes declined to 20% of pre-Covid levels due to the lockdown. Since then, volumes have gradually picked up, increasing to 30% and 50% of normal levels, in May and June respectively. Margins are likely to remain firm, given low gas prices and management’s focus on cost controls in FY21E. The stock trades at 35.6FY21EPS

MGL management is hopeful of a faster recovery in volumes, on the back of its CNG segment, as restrictions on vehicle movement ease. The stock trades at 16.3x FY21EPS – at a significant discount to IGL.

Gujarat Gas (GGAS) has exclusive license to lay and distribute gas in 40 cities which provides long term volume growth visibility. Amid lockdown, volumes are likely to hit severely as industries account for bulk of sales (75-80%), however this will normalise with pick-up in economic activity. Stock trades attractively at 26.9x FY21E EPS and at a discount to IGL.

Stock performance

Stock Name

01-Jan-20

03-Jul-20

Loss/ Gain

Gujarat Gas

254.9

321.9

26.3%

Indraprastha Gas

425.3

447.4

5.2%

Petronet LNG

266.7

272.9

2.3%

GSPL

219.8

222

1.0%

Mahanagar Gas

1,064.7

1070.1

0.5%

Source: BSE

The last six months have been a roller coaster ride for the equity markets. Despite, many challenges due to the spread of Covid19 pandemic, the share price of companies in the gas utilities sector has given positive returns from January 01,2020- July 03,2020. However, the returns are not magnificent but the sector stocks have managed to stay in a positive zone. Gujarat Gas tops the list with 26.3% return from January 01,2020- July 03,2020 followed by IGL and Petronet LNG in the same period.
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Which mid cap and small cap stocks to invest in for expected Multi-Cap rebalancing?

best multi cap mutual funds
by Nikita Bhoota 17/09/2020

Market regulator SEBI on Friday i.e September 11, 2020 has revised asset allocation norms for multi-cap equity mutual fund schemes. According to the revised rules, multi-cap mutual funds will have to invest at least 75% of their total asset under management (AUM) in equity & equity related instruments versus the earlier threshold of 65% of the total AUM. The market regulator also mandated multi-cap funds to invest at least 25% in each small-cap, mid-cap and large-cap stocks. So, if a multi-cap scheme of a fund house has an AUM of Rs 10,000 crore, it will have to invest at least Rs 2,500 crore each in the three categories of stocks. According to earlier rule, multi-cap funds had freedom to invest across sectors and market capitalizations. SEBI has directed to abide by the revised rules by January 2021.

Data sourced from media reports shows at present the multi-cap fund (AUM of ~Rs1.5tn) holdings are tilted towards large cap stocks (~73% of AUM as of Aug-2020), So it is widely projected that the mutual funds would have to rebalance the portfolios by increasing allocation to midcap stocks (~17% of AUM as of Aug-2020) and small cap stocks (~6% of AUM as on Aug-2020). However, the clarification issued by SEBI (SEBI Clarification Circular) on Sunday evening also points out that portfolio rebalancing is one of the options available to mutual funds and the MF could consider options like merging with existing schemes. The clarification also suggests that SEBI is open to inputs from MF industry on the revised rules for multi-cap funds. 
We have shortlisted some of the 5 mid cap and small cap stocks that can benefit if the portfolio rebalancing was to happen. 

5 Mid Cap Stock Recommendations

Company Sector ~Market Cap
(Rs Cr)
EPS CAGR (%)
FY20-22E
PE FY21E
Godrej Agrovet Ltd. Agriculture 10,190 31 30.1
Coromandel International Ltd. Agriculture 23,727 14 18.7
Ashok Leyland Auto 22,853 49 NA
Kajaria Ceramics Ltd. Building Material 8,270 8 45.2
Ipca Laboratories Ltd. Healthcare 27,214 27 25.1

Source:5paisa Research, BSE

Godrej Agrovet Ltd:
Godrej Agrovet (GAVL) is a diversified, research & development-focused agri-business company. It is one of the leading companies in the animal feed business and the market leader in the oil palm plantation industry in India. Additionally, it has a sizeable presence in agri-inputs (i.e. agrochemicals), dairy products, and processed poultry.

Coromandel International Ltd.
Coromandel is the flagship company of the Murugappa Group and operates in fertilisers and other agri-input segments. It is India's second-largest producer of phosphatic fertilisers and is particularly strong in the South-Indian states of Andhra Pradesh and Telangana. Coromandel has an installed capacity of nearly 3.5m tonne of fertilisers (22% of domestic production capacity) and also operates in the agrochemical, specialty nutrient and organic compost verticals.

Ashok Leyland:
Ashok Leyland (AL), part of the Hinduja Group, is one of India's leading manufacturers of commercial vehicles such as trucks, buses, tippers, trailers and Defence vehicles. It is the second-largest player in the medium & heavy trucks segment in India, with market share of ~33%. AL is one of the leading players in heavy buses with market share of ~43%. The company also manufactures and sells engines for industrial and marine applications, spare parts and special alloy castings.

Kajaria Ceramics Ltd.
Kajaria Ceramics is the largest manufacturer of ceramic and vitrified tiles in India. The company manufactures ceramic wall & floor tiles as well as glazed & polished vitrified tiles. It has also ventured into some allied segments (like bathware, plywood); albeit, these segments are still quite small at present, in terms of contribution to revenues and profits.

Ipca Laboratories Ltd.
Ipca Labs is a fully integrated pharmaceutical company producing branded and generic formulations, APIs and intermediates. The company has a strong position in the domestic market, mainly in cardiology, pain, anti-malarial/bacterial and anti-diabetics products. The company exports to 110 countries and is the ninth-largest pharma exporter from India, in terms of volume.

5 Small Cap Stock Recommendations

Company Sector ~Market Cap
(Rs Cr)
EPS CAGR (%)
FY20-22E
PE FY21E
Kaveri Seeds Agriculture 3467 17 10.9
Quess Corp Industrials 6,470 14 33.6
Sudarshan Chemical Industries Chemicals 3,258 26 27.2
Heidelberg cement India Ltd. Cement 4,268 13 14.9
Persistent Systems Ltd. IT 8,949 23 21.4

Kaveri Seeds:
Kaveri Seeds is one of India's leading seed producers, with a broad product portfolio that includes hybrids for cotton, corn, paddy, bajra, sunflower, sorghum and various vegetables. In addition, in its Microteck division, Kaveri markets micronutrients and organic biopesticides.

Quess Corp:
Quess Corp (erstwhile IKYA Human Capital Solutions) is one of India’s leading integrated providers of business services. Quess is focussed on emerging as the preferred business function outsourcing partner for enterprise customers across a wide range of industries. Quess’ service & product offerings are currently grouped under three operating segments: Work Force Management, Operating Asset Management and Global Technology Solutions. 

Sudarshan Chemical Industries:
Sudarshan Chemical Industries (SCIL) has grown to become India’s largest and the world’s fourth-largest manufacturer of colour pigments. Its estimated market share in India stands at ~35%. The company’s product portfolio comprises organic, inorganic and effect pigments serving four main end-uses: coatings, plastics, inks and cosmetics.

Heidelberg cement India Ltd.
Heidelberg cement India Ltd (HCIL) is a subsidiary of Germany based Heidelberg Cement, the world’s third largest cement producer. HCIL’s clinker plants are located in Madhya Pradesh and Karnataka and its cement grinding units are located in Madhya Pradesh, Uttar Pradesh and Karnataka. Current cement grinding capacity of HCIL is 5.4mtpa (2.1mtpa in Damoh, 2.7mtpa in Jhansi and 0.6mtpa in Ammasandra).

Persistent Systems Ltd.
Persistent Systems is a technology services company. The company’s focus is on helping clients build and manage software-driven businesses. Its business strategy is aligned around four key areas: 1) Digital: Bringing together their technology partner ecosystem, solutions and a unique architecture to enable enterprises with digital transformation; 2) Alliance: Focus on the long-standing and multi-dimensional relationship between PSYS and IBM; 3) Services: Focus on services for software and product development including an agile and experience design; 4) Accelerite: Focus on products that include business-critical infrastructure software for enterprises, telecom operators and the public sector.

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A Beginner’s Guide to Investing Internationally from India

International Investment
by Vested Team 20/09/2020

Ace investor & co-founder of First Global, Shankar Sharma’s global portfolio was up 70% in 2019. His Indian portfolio, by his own admission, didn’t do nearly as well. He attributed this performance to this strategy of diversifying across countries. “If you have single-country, single-asset exposure, you are fated to lose sooner or later, irrespective of what the government or fund managers tell you,” he says. In the post-Covid era, he’s gone to highlight how Indians must expand their horizons beyond domestic shores. “The Indian market has delivered zero, in fact, negative returns in dollar terms,” Sharma adds.

In 2020, Indians are now eyeing international investments in larger numbers than ever before. There are several factors fueling this interest. A number of US stocks, including Apple, Amazon, and Facebook, have exhibited steady upward growth, making them attractive alternatives to Indian stocks. In contrast, investing in the Indian economy has been a mixed experience in 2020 and prior. Even before the coronavirus pandemic, the International Monetary Fund (IMF) lowered India’s economic growth forecast from 6.1% to 4.8% for 2019-20. Naturally, the numbers became more concerning as markets tanked March onwards. Such developments, coupled with a broad increase in interest, are paving the way for international investments from the Indian investor community. If you’re looking to get started with investing internationally from India, here’s a handy guide covering the what, the why, and the how.

Why should you invest in US Stocks?
“What’s interesting about US stocks is that you not only get exposure to the United States but also to the world, as many companies have global operations but are listed there.”This statement from Viram Shah, co-founder and CEO of Vested Finance, highlights one of the major advantages provided by investment opportunities in the US market. Portfolio diversification is one of the many reasons why investing in US stocks is a helpful addition to your portfolio. US indices such as the NASDAQ and S&P 500 have very little correlation with Indian indices such as the Sensex – 0.36 over the past decade, to be precise. From a diversification perspective, this makes investing internationally an essential task for Indian investors.

vested graph 1

Figure 1: Dow Jones Industrial Index vs Sensex. Annual returns 2010-2019. Source: ET

Another advantage that the US stocks have over Indian stocks is the currency in which they trade. The US dollar is up 6% against the rupee this year alone. The US markets have also proved to be more stable than Indian markets in the long run.

And when you focus on returns, international investments typically outperforms domestic stocks investments. The DJIA has beaten the Sensex over 3-year, 5-year, and even 10-year periods.

Perhaps more importantly, despite this performance, the Dow Jones is at a lower price-to-earnings value (20.53) than the Sensex (25.01) as of Feb 2020. At the same time, dividend yield remains higher in US markets.

vested graph 2

Figure 2: Returns comparison between Dow Jones and Sensex (INR based), from January 2009 – Dec 2019

So, how can you get started?
How to start investing internationally from India
Investing in international markets may seem overwhelming at first. But it is 2020, and fortunately, the process has been significantly simplified for those who are keen on diversifying their portfolios. There are many ways by which you can go about investing internationally:

  • You can purchase mutual funds that invest in international stocks
  • You can invest in Exchange Traded Funds (ETFs) using an investing account. ETFs are different from mutual funds as they are listed and traded just like stocks and tend to have lower expense ratios
  • Or, you can directly invest in international stocks listed on international exchanges using dedicated platforms.

How to invest in US stocks with 5paisa
5paisa through Vested platform facilitates international investing by offering both direct investments in stocks and ETFs and investments through curated portfolios. Investors can open an account through a paperless process with no minimum balance and take advantage of commission-free investing. All they need to provide is their:

  1. PAN card number and copy, and
  2. Proof of address

Here’s how the two investment options work:

  • Direct investments by opening a US brokerage account: To facilitate direct investments, we offer a dedicated platform where Indian investors can directly purchase stocks and ETFs in the US markets. This method lowers overall costs for the investor, but funds must be wired to the US. The Liberalisation Remittance Scheme (LRS) allows this, with the annual upper limit capped at $250,000 per person. We also offer fractional investing capabilities, lowering the barrier of entry for many
  • Diversified investments into curated portfolios for varying risk profiles: Our platform, investors that want more advice on what to invest, can also invest in Vested’s proprietary curated portfolios. These portfolios are called Vests. Vests are curated for different risk profiles and are constructed with different themes in mind. Vests might be a great option for investors looking to expand their investments to international shores but wishing to retain a narrow focus on specific sectors or industries
vested 5paisa

How does Taxation work

International Exchange Traded Funds (ETFs) are treated as debt funds for taxation purposes. This means that to qualify as long-term holdings, you must keep them for three years. While the short-term capital gains tax rate is as per your applicable income tax slab, long-term capital gains tax is charged at 20% with indexation benefits.
For investors making direct investments in US markets, they are liable to pay taxes on both investment gains and dividend gains. Investment gains will be taxed in India only – where the tax liability is determined by the duration of their holdings. 24 months is the long-term capital gain threshold, with the rate of 20% with indexation benefit. Investments held less than 24 months will incur short-term capital gains tax, calculated according to applicable individual income tax slabs.

Dividends are taxed in the US at a flat rate of 25%. Thanks to the US and India’s Double Taxation Avoidance Agreement (DTAA) though, taxpayers can offset the income tax they’ve already paid in the US. Learn more about this topic here: how taxation works for Indians investing in US markets.

Investing Internationally from India: Closing Thoughts

International investments help you gain exposure to other markets. Geographical diversification can reduce country risk, including risk from negative events that might impact India’s domestic economy. Moreover, as mentioned earlier in this post, when you compare investing in Indian markets vs US markets, US stocks have historically exhibited lower volatility, higher returns, and higher international exposure.