Is It Worth Getting an Exposure to India?

The fear of missing out frequently stalks fund investors. In the case of India, large fund inflows over the past 12 months has created a sense of urgency to better understand the opportunities and risks of this emerging market. That’s why many investors are asking whether now is the right time to gain exposure to the world’s sixth largest economy.

India has witnessed significant foreign inflows as of late. In the 12 months through March 2017, foreign direct investment (FDI) increased 29% to $40 billion. India’s economy is expanding more than 7% annually, making it one of the few bright spots in a global landscape marked by subdued growth.

As China shifts its focus from traditional smokestack industries toward consumption, India is expected to pick up the slack and become another global manufacturing base. Investors should expect India’s GDP growth to outstrip China’s over the next five years.

As part of its modernization efforts, India is also implementing a Goods and Services Tax (GST) regime. Combined with the recent demonetization efforts, the GST program will increase state revenue, thereby boosting government outlays for years to come. These factors are expected to produce economic growth of around 8% annually over the next few years, according to S&P Global Ratings.

The years from 2017 and beyond might also see ‘mean reversal,’ a phenomenon where market returns rise sharply following years of subdued growth. Historically, Indian markets have performed incredibly well when their long-term historical returns have been low. Weak performance aptly describes the post-financial crisis period, where India’s benchmark Sensex generated a 10-year rolling return of only 6.64%.

As mentioned previously, India has quickly become the pre-eminent emerging market that offers investors strong economic growth, rapid industrialization, improved corporate governance and stronger regulatory oversight. Rapid urbanization, which is expected to move hundreds of millions of Indians from rural communities into cities, will offer tremendous economic opportunity for locals, multinational corporations and investors.

The Indian government has placed a great deal of importance on infrastructure development and is implementing more liberal policies to attract FDI. For these reasons, India could be a major catalyst in the next wave of globalization – one that offers many of the same after-tax, corporate governance and diversification benefits of other leading emerging markets.

While many other emerging markets are adopting similar strategies, India has unique advantages tied to its massive population, low-cost production capacity and highly skilled tech talent. What’s more, India is the only major economy forecast to grow more than 7% annually in each of the next two years, according to the International Monetary Fund. Emerging markets such as Brazil, Russia, Indonesia and South Africa pale in comparison.

In case you are wondering whether mutual funds are right for you at all, you should read about why mutual funds, in general, should be a part of your portfolio.

As with any other country, there are both direct and indirect ways to gain exposure to India. One direct way is to buy shares of Indian companies. Indirect exposure might entail buying shares of multinationals with a presence in India. However, many investors have found mutual funds to be an even better approach because they can provide both direct and indirect exposure to the country of interest.

Qualified foreign investors have been allowed to invest in Indian mutual funds since 2011. According to the Securities and Exchange Board of India (SEBI), a ‘qualified foreign investor’ is one who resides in a member of the Financial Action Task Force (FATC) and is a resident in a country that is a signatory of either IOSCO’s Multilateral Memoradum of Understanding (MMOU) or a signatory of a bilateral Memorandum of Understanding (MOU) with SEBI. Currently, U.S. residents are eligible to invest in Indian mutual funds.

Additionally, foreigners can always gain exposure to the Indian market via funds provided by global fund houses, such as Vanguard, Fidelity and Principal. It just so happens that Indian funds have had a stellar 2017. The Matthews India Instl (MIDNX), which invests heavily in Indian stocks, is up more than 26% year-to-date. Eaton Vance Greater India C (ECGIX) gains similar exposure, but expands its reach to neighboring countries on the subcontinent.

Funds like MIDNX, ECGIX and the Wasatch Emerging India Investor (WAINX) also provide strong exposure to defensive sectors, which tend to remain stable during volatile business cycles. These funds also provide high-cyclical sector exposure, with a focus on materials, consumer cyclical and financials.

As a high-reward opportunity, Indian funds also present risks that investors need to carefully weigh. For starters, access to the Indian market is expensive, as evidenced by the expense ratio. Aside from the funds themselves, Indian markets are still emerging from a prolonged slump, making them especially prone to volatility. The government’s demonetization campaign has been chaotic, as hundreds of millions of people suddenly rushed to banks, ATMs and foreign-exchange counters to revalidate their money. Against this uncertainty, investors need to tread carefully.

Check out our India Equity Funds section to explore more India-focused funds.

Investors in search of the next big emerging market investment opportunity need not look any further than India. With the right plan of action, investors can align their portfolios to this emerging market right away.

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