Can the Indian summer continue?

But does the market really deserve the hype? With companies such as Hindustan Unilever (HINDUNILVR:NSI) trading at 40 times one-year forward earnings and the MSCI India index returning 31.58 per cent in 2014, can the market go any further up, or is a correction around the corner?

The good news

Commentators say there is plenty to celebrate in India as tangible change and the political will to reshape the emerging economy into a global powerhouse is at an all-time high.

The election of business-friendly leader Mr Modi in May 2014, a champion of clean, efficient government, was a key moment in Indian history. His Bharatiya Janata party won more seats than any party since 1984 and created the first Indian government for 30 years that is able to govern independently of other parties.

He has already succeeded in reducing the fiscal deficit, as well as the nation's current account deficit, which moved from 2 per cent of GDP in the third quarter of 2014 to 1.6 per cent in the fourth. Last month, the Indian government unveiled its first full-year Budget and handed India's central bank a legal mandate to target inflation for the first time. The move was quickly followed by an interest-rate cut by Reserve Bank of India Governor Raghuram Rajan in a sign that inflation had finally been wrestled to manageable lows after years of double-digit figures.

"I think there has been a lot of hype, but I do think that there is substance behind it," says Legal & General Investment Management emerging market strategist Brian Coulton, while Jan Dehn, head of research at Ashmore, says signs for optimism include "credible monetary policy under Mr Rajan at the RBI, fiscal discipline at the central government level and a desire to tackle supply-side constraints to unleash the country's growth potential".

Mr Modi's majority in the lower house gives him rare power to push through reforms, including one of the country's biggest ever tax shake-ups - the goods and service tax (GST). The scheme would replace the patchwork of state taxes with a single rate and has been heralded by big business as a game changer.

The government has also pledged 24 per cent increased spending on infrastructure, aided by a current account boost from lower oil prices. That boon will also have helped Mr Modi push through the scrapping of fuel subsidies, which would hit the consumer if oil prices rose but will give the government a substantial cushion to invest elsewhere.

"The population may be up in arms if the oil price rises but there won't be a fiscal cost, so they've chosen the timing well," says Mr Coulton. "It's allowed them to make permanent changes at a time when the implications for the population were minimal."

Too good to be true?

But with Indian stocks trading at such high valuations and the market rallying to record highs in under a year of Mr Modi's reign, can this story be as good as it looks?

"Markets have gone up a lot in a short space of time and a lot of that is expectation," says Ben Yearsley, head of investment research at Charles Stanley Direct. "The key to long-term success is whether or not Mr Modi delivers on reform, on cutting red tape and investment into the economy. There is a lot of growth there, but it has gone up so quickly and by so much that there could be a short-term setback."

Justin Oliver, investment director at Canaccord Genuity Wealth Management, is sceptical about the growth figures. "Most of the bullish case for India seems to be predicated on the reforms and I wouldn't argue against that, but many of those benefits will only truly emerge over the long term," he says. "If you want to see real growth and profits coming through, you need to see capital expenditure (capex) expanding. It needs to be growth predicated not just on consumer spending. In the past it has been a very underinvested economy and it's almost an issue of looking for the right kind of growth."

Since 2012, capex levels have stagnated, with new private sector project announcements falling to their lowest ever level in the third quarter of the 2013-14 financial year, according to research from Citi. Capex project announcements have also fallen from 7,000 at the beginning of 2012 to only 4,900 at the end of 2014.

Many blame the previous government for throwing down roadblocks to project approval, while others point to enormous debt levels in India's private and banking sector.

"Historically the banking sector has financed capex and, in order for banks to lend, they require deposit growth," says Mr Oliver. "But total bank deposits are growing at 12 per cent, a way off their 2008 peak of 24 per cent," he adds.

Too late to join the party?

"The right time to invest in this market was when everyone was labelling India a 'fragile five' country," says Mr Dehn. "There is still upside in Indian stocks, but equities are now trading above their long-term valuations. There is further upside, but the upside is probably more modest."

"The easy money has probably been made," says Tim Cockerill, investment director at Rowan Dartington. "The market has risen on the back of expectation and, to me, it has the classic feel of an event taking place that could transform the market, but there could be a period of disappointment when the expectation and reality don't marry up."

Take it slow to avoid a shock

If you are not already invested in India, the key lesson to take from commentators' concerns about overhype is to be cautious and invest in India bit by bit, instead of putting in a lump sum.

"There is a great temptation to look at the last 12 months and think that's a great story, but I would urge caution," says Mr Cockerill. "Dropping money in on a monthly basis could work out very well if this year turns out to be a fairly non-eventful year for Indian investment or the market falls suddenly."

"I like India, but I'm not an uber-bull," says Darius McDermott, managing director of Chelsea Financial Services. "If I didn't have any allocation in India I wouldn't put it all in in one go today, I would drip it in." While Mr Yearsley says: "Find what you want to invest in and phase it in over the next six months or so. Don't rush in and buy it all in one go; it will reduce your entry point risk and your buying risk.”

How to play it

Whether or not a market correction occurs, India is arguably the star of the emerging markets today. But how should you access it?

Mr Yearsley says: "I can't get excited about passive funds in India. There are a lot of exciting growth opportunities in the mid-cap space and you won't get that with a passive fund." The regulatory market in India also means replicating indices can be tricky, making active arguably the more appealing route.

Mr Yearsley likes Jupiter India (GB00B2NHJ040), which is available for an ongoing charge of 1.09 per cent on platforms. It has delivered cumulative returns of 41.86 per cent, compared with 28.7 per cent for the MSCI India index over five years.

The fund's largest exposure is to Hindustan Petroleum (HINDPETRO:NSI). Jupiter's global emerging markets head of strategy, Ross Teverson, says the company is trading at 11 times consensus earnings for the 2015-16 financial year, but he believes there is value to be had due to diesel price deregulation, which could drive up earnings expectations.

The fund also has a 4.8 per cent exposure to IT outsourcing giant Tech Mahindra (TECHM:NSI), trading at large one-year consensus earnings of 16 times.

Mr Cockerill points to New India Investment Trust (NII), an Aberdeen fund that delivered similarly stellar returns to its peers last year, but has typically fallen less than comparable funds in down markets.

The trust is trading on a discount of 8.96 per cent and its exposure is weighted most heavily towards financials and information technology, with consumer staples also making up 13.8 per cent.

JPMorgan Indian Investment Trust (JII) is trading on a wider discount of 11.48 per cent. Its largest stocks are broadly similar to NII. Housing Development Finance (HDFC:NSI) makes up 9.1 per cent of NII and 7.1 per cent of JII. Tata Consultancy Services (TCS:NSI) is NII's second largest holding and JII's fifth.

However JII has a much larger exposure to financial, at 37.8 per cent, compared with 18.6 per cent for MSCI India. Over the long term, it is has underperformed the benchmark but has beaten it over five, three and one years.

Mr McDermott suggests Neptune India (GB00B1L6DT30), which also holds similar stocks to JII and NII but is more diversified across sectors. It has performed well in the long term and has an ongoing charge of 1.4 per cent.

The diversified route

Another, more diversified route into India is through an Asian investment trust. Several come highly recommended and are well exposed to India on the back of last year's rally. Mr Oliver likes First State Asia Pacific Leaders (GB0033874214). He says: "We leave it to the Asia-based fund manager to make the decisions, they are closer to the market than we will ever be."

Pacific Assets Trust (PAC) is another First State Asia trust whose biggest holding is Tech Mahindra while Baillie Gifford's Pacific Horizon Investment Trust (PHI) has 24 per cent exposure to India and is trading at a discount of 9.94 per cent.

Performance of recommended Indian funds (% total return)

Performance of recommended Asia funds (% total return)

Source: FE Analytics, as at 26 March 2015

Premiums/discounts of recommended investment trusts %

Source: Morningstar, as at 26 March 2015