Investing in US stocks? 7 risks Indian investors should understand before putting money in

Investing in US stocks has become increasingly accessible for Indian investors, allowing them to own a slice of global companies such as Apple, Microsoft, Amazon and Nvidia. With several investment platforms offering easy onboarding, fractional shares and digital transactions, investing overseas may seem as simple as buying domestic stocks. However, the convenience can mask risks that investors may not fully understand. These are:

Market risk

US markets operate during Indian night hours. Investors may not be able to react immediately to overnight news, earnings, or market moves. So, investors operating from different parts may face time-zone/market timing risk.

“The main risk all equity markets face is market risk. US share prices can fall sharply due to company performance, interest rates, recession fears, earnings misses, or global shocks. No platform or broker protects against this loss,” said Madhupam Krishna, SEBI RIA and founder of WealthWisher Financial Planners & Advisors.

Currency risk

Besides, US stocks can fall because of company-specific developments, economic conditions or broader market corrections. Indian investors also face USD-INR exchange-rate risk. Even if a stock rises in dollar terms, rupee depreciation or appreciation can change the final return when converted back into rupees.

“The risk for all foreign-based investors is currency risk. The investments are dollar-denominated, but an Indian investor measures returns in rupees. If the rupee appreciates against the dollar, it can reduce rupee returns even if the stock rises in dollar terms,” said Krishna.

Taxation and compliance

Cover tax on dividends, applicable US withholding, Indian tax treatment of foreign income and capital gains, and the reporting obligations that may apply to foreign assets and income.

The reference to Form 67 and foreign-asset disclosures needs to be explained carefully: Form 67 relates to claiming foreign tax credit in applicable cases. In contrast, foreign-asset and foreign-income reporting is generally addressed through the relevant income-tax return schedules.

“Rules on LRS, TCS, foreign-asset reporting, and taxation can change. Investors must stay compliant with both Indian and US requirements. He always faces a regulatory & compliance failure risk,” said Krishna.

Also read: Can an SIF’s hybrid long-short strategy protect your portfolio during a market fall?

Broker, custodian and investor protection

Investors should identify the actual executing broker and the firm holding their assets. Explain the roles of US regulators, including the SEC and FINRA, and the limits of SIPC protection.

SIPC protection is generally capped at $500,000 per eligible customer, including up to $250,000 for cash, subject to applicable rules. It addresses missing customer assets when a member brokerage fails; it does not compensate investors for market losses.

“The Indian investor uses an app/platform, and they deal only with the interface while the actual broker/custodian holds the assets. Operational failure, transfer restrictions, or poor service can create access and recovery issues. So, he faces operational/custody risk,” said Krishna.

Hidden and recurring costs

You may also need to pay brokerage, foreign-exchange markups, bank transfer charges, regulatory fees, withdrawal charges and inactivity fees. These can eat into returns, particularly for investors making small or frequent transactions.

Fractional shares and ownership structure

Fractional investing makes expensive US stocks accessible with smaller amounts, but fractional positions may not be transferable between brokers. Whole shares and fractional shares can also have different voting and transfer arrangements.

Withdrawal, settlement and exit risk

Investors should check how long it takes to sell shares, settle transactions, convert dollars into rupees and withdraw funds. Minimum withdrawal amounts, documentation requirements and bank-account restrictions may affect access to money.

“US markets are tech-heavy. So, investor if buying familiar US mega-cap stocks can create heavy exposure to a few companies or sectors, especially technology falling is concentration risk. Similarly, most large US stocks are liquid, but small-caps, thinly traded ETFs, or securities during volatile periods may be harder to sell at the desired price. The risk here is Liquidity risk,” said Krishna.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.