A Simple Guide to Stock Market Investing in India

Since the liberalization of markets in India during the early 90’s, the Indian Stock Market has performed exceptionally well. SENSEX has returned a compounded average of 18% since 1979 for 30 year period ending in 2009. That is quite impressive. So, it is no wonder that investors want to invest in the Indian Stock Market. There are two main ways you can invest in the Indian market.

Individual Stocks Trading

This type of trading allows you to buy, hold, or sell shares of individual companies listed on the stock market exchange. You make money from dividends (i.e. profit shared by the companies you invest in) and capital gains (i.e. profit generated on the shares' sell price when you buy low and sell high). To trade individual stocks, you need to open the following:

For Residents Indians

(1) PAN Card: You must have PAN (Personal Account Number) card issued by the Government of India. Most people who are employed in India should have this. This is needed to report taxes owed to the government from your profits.

(2) Trading Account: You would need open a Trading Account with an online broker. There are plenty of those in India such as sbicap securities, ShareKhan, Motilal Oswal, Kotak Securities, ICICIDirect, and more.

(3) Demat Account: You would also need to open a Demat Account. Demat account is an account wherein you can hold shares of various companies in the dematerialized (or electronic) form rather than paper certificates.You can open a Demat Account with a share brokerage or a bank. Some brokers even let you open Trading + Demat account together with them.

(4) Savings/Current Account: You also need to have a regular Savings/Current Account with a bank. This account is used to transfer money to the Trading account for share purchases and back when the shares are sold. If you are non-resident, then you do not need this.

For Non-Resident Indians (NRI, PIO, OCI)

If you are a non-resident Indian, you need the first 3 items, plus the following two.

(4) NRE/NRO Account: If you are non-resident Indian, then instead of a current/savings account, you need NRE or NRO account to transfer your funds from abroad to an account in India. I have covered NRE and NRO Accounts in my NRI Savings Accounts Review.

(5) PIS Account: PIS, which stands for Portfolio Investment Scheme, is nothing a but a permission letter offered by a bank on behalf of the Reserve Bank of India (RBI) that enables you as a non-resident customer to invest in the stock market. Since RBI is involved, it has authorized only a few branches of selected major banks to conduct the business under PIS scheme. Your application is routed through the branch that is authorized to open a PIS Account for you.

Mutual Funds Investing

Investing through mutual funds is by far the simplest and easiest way to enter the stock market in my opinion. PLUS, your risks are greatly reduced when you invest through mutual funds because the money you invest is used to buy shares of hundreds or even thousand of companies. Your risk is distributed to all these companies that form the mutual fund, so mutual funds are less volatile and less risky. To invest in mutual funds, you need to open the following:

For Residents Indians

(1) PAN Card: You must have PAN (Personal Account Number) card issued by the Government of India. Most people who are employed in India should have this. This is needed to report taxes owed to the government from your profits.

(2) Mutual Funds Account: You would need open an account with mutual fund broker such as FundsIndia (my favorite one) or FundSuperMart. This account is free and opening process is very quick. You are asked to sign off on the form and send supporting documents. Once the documents are verified, your account is activated.

(4) Savings/Current Account: You also need to have a regular Savings/Current Account with a bank. This account is used to transfer money to the Mutual Funds account for share purchases and back when the shares are sold. If you are non-resident, then you do not need this.

For Non-Resident Indians (NRI, PIO, OCI)

If you are a non-resident Indian, you need the first 2 items, plus the following.

(4) NRE/NRO Account: If you are non-resident Indian, then instead of a current/savings account, you need NRE or NRO account to transfer your funds from abroad to an account in India. I have covered NRE and NRO Accounts in my NRI Savings Accounts Review.

Caution for NRIs in the USA

Tax filing rules for profits earned overseas are quite complex, and perhaps draconian. These rules are designed to deter US investors from investing in foreign markets where brokers are not registered with the SEC (Securities & Exchange Commission).  See PFIC Taxes on Mutual Funds Investments in India.