As we have often talked about in our posts earlier, Diversification is often called the only free lunch in investing. It is the process of spreading your investments across different asset classes (equity, debt, gold). Even within equities, you can be invested in the Domestic markets and International markets. Investing outside India can provide a great way to truly diversify your portfolio. A recent trend to gain that exposure has been via investing in Nasdaq.
But first, let’s understand what is the Nasdaq, why should we invest in foreign markets, and finally how can we do it.
What is Nasdaq?
Like the Bombay Stock Exchange (BSE) & National Stock Exchange (NSE) in India, Nasdaq is an American stock exchange, where investors can buy and sell securities like shares, bonds, and other financial instruments. It is the second-largest stock exchange by market capitalization after the New York Stock Exchange (NYSE).
If you wish to invest in Nasdaq, you can do so by either investing in Nasdaq100 or Nasdaq composite. The former consists of 101 non-financials firms listed on the Nasdaq stock exchange and includes some of the best know technology companies like Apple, Facebook, Amazon, etc. The latter includes all the companies listed on Nasdaq.
Why foreign markets though?
Accurate price discovery: US markets are the most mature and developed stock markets in the world. According to a recent survey, over 58% of Americans invest in the markets compared to only about 4% in India. As a result, this ensures that the price discovery of the stocks is accurate as there are many market participants involved. And, no single institution can usually influence the price of the stock for too long ensuring that the current price reflects the most accurate information available in the market.
Diversification of funds: US stock market does not rise and fall at the same time as the Indian markets. Therefore, to build a diversified portfolio it often makes sense to also geographically spread your bets so that you reduce the risk of your portfolio and also have the opportunity to potentially generate returns even when the domestic stock markets are not performing well.
Ways to Invest In Nasdaq from India
You could either invest directly i.e. hold individual stocks or invest through ETFs/mutual funds. Let’s discuss each in more detail.
You have the option of investing directly in the stocks forming the Nasdaq100. E.g. You can invest in stocks like Apple, or Google by opening a US brokerage account either through a local broker or a foreign broker/bank which has a presence in India. For doing this, you will have to also transfer the fund to the US. As per current RBI guidelines, under its LRS program – an Indian resident is allowed to remit up to US$250,000 per year.
You should be careful in selecting the broker that you choose because it can involve a lot of hidden costs like remittance fees, conversion fees, etc.
If you want to stay away from the hassle of going through the cumbersome process of investing directly, you should consider taking the indirect route and investing through ETFs/mutual funds.
One way to invest in Nasdaq is through ETFs. Exchange Traded Funds (ETFs) are a bunch of stocks/bonds under the hood of a single fund which are very similar to mutual funds but unlike MFs, ETFs are traded in the stock market just like other stocks. E.g. You can buy the Invesco Nasdaq 100 ETF (QQQM) which tracks the Nasdaq 100 index.
If you wish to purchase the above ETF, you are required to open a brokerage account in the US which allows you to hold those ETF units. Alternatively, you can also invest in these ETFs in India by buying equivalent ETFs like Motilal Oswal Nasdaq 100 ETF which allows you to get exposure to Nasdaq without having to open a US brokerage account. But even for this option, you will be required to open a Demat and a trading account with a local broker in India.
- Mutual Fund
If you do not want the hassle of opening a Demat/trading account for buying ETFs, you can invest via the mutual fund-of-funds route. Funds of Funds (FoFs) are a type of investment route/instrument in which a local fund takes your money and invests it in a US-based mutual fund which in turn invests in Nasdaq.
Example: Kotak Nasdaq 100 FOF
The Bottom Line
If you are looking to spread your investments across different asset classes, you should invest in the Nasdaq. In today’s highly globalized and interconnected world, it is essential to have some part of your money invested abroad to diversify your portfolio. Technology and regulatory intervention have made it easier than ever before to do that.