The announcement of investor-friendly reforms such as the relaxation of foreign direct investment rules has driven Indian equities up over the past few weeks. The reforms include an increase in the amounts foreign investors can put into aviation, retail, broadcasting and trading, as well as controversial measures to tackle the fiscal deficit - including a 14 per cent increase in diesel prices.
For this reason, investors such as Samir Mehta, manager of the JOHCM Asia ex Japan Fund, have increased exposure to India. Mr Mehta has moved to a large overweight position. "India has been experiencing rising interest rates, a falling currency and slowing credit, a potent combination to restore sanity for a beleaguered economy," he says. "The Reserve Bank of India's actions have been painful but necessary, and we should witness the foundations of better quality growth in India."
India is cheap in terms of its historical price/earnings ratio, according to Esty Dwek, investment strategist at HSBC Private Bank, while its reliance on domestic demand rather than exports as the main driver of GDP means it is less vulnerable should China slow.
As one of the Bric (Brazil, Russia, India and China) key developing nations, there are also longer-term reasons to invest in India. India has a young population only second in size to China and, with growing numbers of people becoming wealthier and moving into cities, consumption is set to rise. The country also has a wealth of natural resources and is a significant agricultural producer.
"While developed stock markets are mostly in secular bear markets, and their economies are enduring a contained depression, India is in a long-term bull market and now appears to be emerging from a healthy correction, and the Indian economy remains at an early stage in its development based on GDP per head numbers," says Brian Dennehy, managing director at independent financial adviser Dennehy Weller. "There is a very real possibility that the two-year downturn is over, and a new bull market in Indian shares is anticipating a renewed long-term boom for the Indian economy."
But like other emerging markets, India doesn't come without risks, for example economic reform could progress slowly, and infrastructure and standards of corporate governance are poor. Even if its equity markets are cheap relative to their history, India is pretty expensive relative to other emerging markets, according to Mick Gilligan, head of research at broker Killik, and he suggests that most investors are better accessing India via a broader Asian or Emerging Market Fund. (see IC Top 100 Funds for our favoured options).
If you do go into a single-country India fund, you should have a higher risk appetite and an investment horizon of at least 10 years, according to Mr Dennehy. Some argue that in less researched and inefficient emerging markets you should use an active fund with good opportunities to add value.
However, there are few UK-domiciled India funds to choose from and these have total expense ratios (TER) of around 1.7 per cent or more, although JPM Indian investment trust is more reasonable at 1.51 per cent. You may wish to use one of several passive exchange traded funds (ETFs) which track India with lower charges:
The iShares S&P CNX Nifty India Swap (Ticker: NFTY) tracks the S&P CNX Nifty Index, 50 of the largest and most liquid companies listed on the National Stock Exchange of India. The ETF launched two years ago during which time the tracking difference between the fund and index has been 1.83 per cent. It has a TER of 0.85 per cent.
Unlike other iShares ETFs which buy the underlying stocks in the index, this ETF uses synthetic replication - it gets its returns via a derivative swap rather than buying the shares. However, it uses multiple swap counterparties to mitigate the risk of one of them defaulting, and holds collateral worth more than the counterparty exposure.
db X-trackers also offers an S&P CNX Nifty Index tracking ETF, the db x-trackers S&P CNX Nifty Fifty ETF (ISIN: LU029210969) with a TER of 0.85 per cent, but there is a wide tracking error between the fund and the index since its launch in July 2007 of 4.18 per cent.
If you want broader exposure to India, you could buy db X-trackers MSCI India TRN Index ETF (ISIN: LU0514695187). This tracks the MSCI India TRN Index, which comprises all companies with a market capitalisation within the top 85 per cent of the Indian investable equity universe on a total return basis and is currently made up of 73 companies. The ETF has a TER of 0.75 per cent and a tracking error of 1.77 per cent against its index since its launch in June 2010. This ETF uses synthetic replication and mitigates counterparty risk by holding collateral nearly 18 per cent higher in value than the fund's net asset value (NAV).
Alternatively, MSCI Source India ETF also tracks the MSCI India TRN Index. It has a management fee of 0.85 per cent plus a swap fee of 0.30 per cent - it uses synthetic replication, but has several swap counterparties and also holds collateral so that it never has around more than 5 per cent exposure to these. However this ETF is very small at just over £2m.
