Cash in on a long-term Indian bull run

The Indian economy has suffered from low growth and inflationary pressure over the last few years. But since the beginning of 2014, it has stormed ahead of the other 'Brics' (Brazil, Russia, India and China), the world's largest and most powerful emerging markets. India's Sensex 30 index is up 20 per cent and Brazil's Bovespa index has risen by 13 per cent from the beginning of the year to 21 July 2014. But China's Shanghai SE Composite Index, and Russia's RTS index have both suffered, and are down 8 per cent and 21 per cent, respectively. In general, emerging markets lagged developed markets significantly in 2013, causing swathes of investors to ditch them from their portfolios.

But the change in Indian government means the potential for reforms that could positively impact the country's stock market is huge. The BJP looks well positioned to push through reforms that are necessary to allow India to further expand its growth rate. To achieve this, India would need to focus resources on industrialisation, investment in infrastructure, and getting rid of bureaucracy and 'red tape', while combating corruption. Mr Modi, who previously served as chief minister of the Indian state of Gujarat, has a track record of reformist action, and he has promised more of the same.

It remians to be seen whether this talk will result in action, but Kunal Desai, manager of the Neptune India Fund (GB00B1L6DV5), is confident it will. He said: "Mr Modi's ambitions should not be underestimated. Hardly any Indian government has come to power with as favourable an economic backdrop as is the case now. Growth is bottoming, with a revival now expected. But what excites us the most is the potential of policy headwinds transforming into tailwinds. This is what will drive a structural re-rating of Indian equities alongside an earnings upgrade cycle. These elections have put India back on the map and it is now too important to ignore."

Sam Vecht, manager of BlackRock's BSF Emerging Markets Absolute Return Fund (LU0852339042), increased his exposure to India in summer last year when many in the market were concerned about India's current account problems and a falling rupee. He said: "Our preference is for domestic cylicals and stocks, especially state-owned enterprises, as these would benefit from meaningful governmental reform. We note that many of these stocks have gone up substantially in the last nine months, but they continue to offer value and are much preferred to the exporters and defensive consumer names."

How does India compare to the other Bric nations?

Guy Stephens, director at Rowan Dartington, says: "In Russia, president Putin's recent antics do little to encourage economic investment from overseas , while China continues to defy the bears with another huge spending programme, putting off any action to address the debt-fuelled growth phenomenon which must surely come home to roost at some point. Brazil has some major economic influences, courtesy of this summer's Football World Cup. Meanwhile, Mr Modi's election is being compared to that of Margaret Thatcher and the changes she brought to the UK. In my view, it is all about to kick off in India."

Positive developments appear to be falling into place in India, but investors should be aware that real progress and, in turn, healthy investment returns for investors may take years to come to fruition. The consensus is clear - India is for a long-term investment only. And Sunil Asnani, portfolio manager at Matthews Asia, warns that investors need a reality check, as they must not get too carried away.

"Investors looking to invest in India should take a tempered view as there are real challenges ahead for Mr Modi and his party. They should focus on companies that can best chart their own destinies, and avoid the ones that are dependent on macro calls playing out. The country continues to battle long-standing inflation, low job growth and stalled investments," he said.

Funds with exposure to India

Single country India funds are not for the faint-hearted as they are highly risky. But if you have an especially high appetite for risk, and you are feeling bullish about India's future, here are some funds that will give the exposure you're looking for.

One of the best performing India-only funds over the past year has been the India Capital Growth Fund (ICG). It has returned 26.8 per cent over the year to 17 July 2014, the best performance of any India investment trust or open-ended fund. Despite this, it is trading on a very wide 18 per cent discount to net asset value (NAV) ratio, compared to its 12-month average discount of -22 per cent. It aims to provide long-term capital appreciation by investing both directly and indirectly in companies based in India. It has a bias to mid and small-cap Indian companies, with a smaller proportion of its portfolio in unlisted Indian companies. In term of sectors, it invests primarily in financial services (22 per cent), healthcare (10 per cent) and consumer defensive (10 per cent).

Also on a hefty discount to NAV is the New India Investment Trust (NII), which returned 17 per cent compared with 15 per cent by its benchmark, the MSCI India index, over one year to 31 May 2014. The trust, which is trading at a 12 per cent discount, compared to its 12-month average discount of 14 per cent, is run by Aberdeen Asset Management's emerging markets team, led by Hugh Young, one of the most experienced managers in this area. The trust has a highly concentrated portfolio of stocks and adopts a high-conviction approach, which has so far translated into outperformance. The fund is heavy in financials (23 per cent), information technology (19 per cent) and materials (17 per cent). New India's total expense ratio is 1.6 per cent.

A cheaper option is to go passive and buy an exchange traded fund (ETF) designed to track an Indian index as closely as possible. db x-trackers' MSCI India TRN Index UCITS ETF 1C (GBP) (XCX5) seeks to track the price and yield performance of the MSCI Daily Emerging Markets India USD index. This ETF will give you exposure to shares of all large- and mid-cap companies within the top 85 per cent of the Indian market investable equity universe. It has returned 25 per cent over one year (to 17 July 2014) according to Morningstar, and has a TER of 0.75 per cent.

Or, if you want some exposure to India, but you're not confident or risk-hungry enough to go for a single country fund, there are a number of options that could fit the bill. Templeton's Emerging Markets Investment Trust (TEM) has earned a place in our IC Top 100 Fund list and has 10 per cent of its portfolio invested in the region. It's managed by Mark Mobius, a veteran emerging markets active fund manager with a sterling track record. Mr Mobius seeks long-term capital appreciation through investment in companies operating in emerging markets or stocks listed on the stock markets of these countries. It is mainly invested in China (26 per cent), Brazil (13 per cent) and Thailand (12 per cent), with India as its fourth biggest investment region. Over five years it has returned 66 per cent (to 30 June 2014), compared to its benchmark, the MSCI Emerging Markets Index, which returned 52 per cent over the period. It has a TER of 1.29 per cent, which is reasonable for an active fund investing in challenging regions.

If you're keen on a big risk injection, but don't want to overload your portfolio with Indian stocks, have a look at Aberdeen's Global Emerging Markets Smaller Companies Fund (LU0278932362). It has been the top performing emerging markets fund over five years, according to Morningstar data, with a 123.2 per cent return. It's mainly invested in Brazil (15 per cent of the portfolio), but its second largest investment region is India, with a 9.4 per cent allocation. The drawback with this fund is its 2.06 per cent a year TER, however the emerging markets team at Aberdeen is one of the best, so the fund's returns might outweigh the high cost of owning it.

Top 20 performing emerging markets funds over five years, and their exposure to India