Investing in India has always offered a compelling opportunity to participate in one of the world’s fastest-growing economies, known for its entrepreneurial drive, robust consumer base, and rapid technological advancements. Whilst we acknowledge that the US markets have been the place to be as an investor over the last 15 years, India has certainty kept pace and excelled since the pandemic.
Total return of India, EM and the US over four years
That’s the idea done – now the way to implement it! Foreign investors require an FPI (foreign portfolio investor) License to buy Indian stocks directly. The process can be cumbersome and time consuming for a non-institutional investor. Thus, the path to investing alongside India’s growth story is often via a managed fund or an exchange traded fund (ETF). With numerous investment funds available, choosing the right one for your financial objectives can feel daunting. This note provides a comparative overview of the main types of exposure to India, helping investors make an informed choice based on their unique goals.
1. India-focused Equity Funds
India-focused equity funds are funds that concentrate on Indian companies, giving investors focused exposure to India’s capital market. These funds aim to capture India’s economic growth and are generally diversified across a mix of large-cap, mid-cap, and small-cap companies. The underlying goal is to harness the growth momentum of India’s fast-growing industries.
Actively managed, India-focused funds provide exposure to companies positioned to benefit from India’s economic expansion, by providing exposure not only to large, successful and well-managed companies, but also fast growing medium and small companies which are yet to reach their potential. Given India’s growth story, it is likely that several of these mid and small sized companies will dominate their segments in years to come as the addressable market they operate reaches maturity.
By investing in India-only funds, foreign investors can benefit from exposure to a wider range of growth companies, specific to India, operating in industries like Pharmaceuticals, Aviation, Food, Textiles, Real Estate and Energy. These types of industries do not feature in other funds we will explore below which have a broader mandate to invest in other countries as well. However, some of these industries will drive India’s growth story over the next decade.
2. India-focused ETF’s
ETF’s have become a simple, convenient way for investors to get exposure to India. Several ETFs today are based on market-cap weighted indices to provide clients with broad exposure to an asset class. India focused ETF’s provide exposure to several companies in a diversified manner and charge lower management fees than most actively managed funds.
However, what a passive (index replication) or Smart beta (systematic/rules based) ETF does not do is take is a fundamental view on which companies will do better than others. It is our view that investing in India requires a fundamental overlay to be imparted on investments. We form this view based on our experience in investing in Indian equities and as evidenced by the long-term outperformance of fundamental stock pickers in India.
3. Emerging Markets/Asia Funds with India exposure
Emerging markets (EM) or Asia-focused funds invest in a broader mix of companies across developing nations, including India. Typically, India comprises a portion of the fund’s overall allocation (10-25%), often alongside other fast-growing economies like China, South Korea, Indonesia, Saudi Arabia and Brazil. These funds offer a diversified portfolio, providing a way to gain exposure to emerging regions, like India.
- Risk Diversification: By spreading investments across multiple countries, these funds reduce the risk associated with investing solely in one country.
- Growth Potential Beyond India: Emerging markets, especially in Asia, offer growth potential. This allows investors to tap into the broader story of Asia’s economic transformation.
- Reduced Volatility: Diversification across various emerging markets can help temper and mitigate volatility.
These funds tend to focus on the larger, more liquid stocks in most countries they invest in as they are quite often quite big in asset size and thus tend to focus on companies which they can exit if there is an issue. This type of fund provides broad exposure to many countries and companies in a simple unitised package. However, if you are specifically interested in India’s growth story, then this exposure can provide a “diluted” exposure to India’s growth story as it is likely to hold no more than 5-15 companies in the region.
4. Global Equity Funds with an India component
Global equity funds offer a balanced approach, investing in companies worldwide, with a small allocation to India (0-3%). India is often underrepresented in these funds, which typically prioritise developed markets like the U.S., Europe, and Japan. However, many global funds are now seeking to include a few Indian companies due to the region’s growing international relevance and competitive advantage in sectors like IT, pharmaceuticals, and financial services.
Choosing the right Fund for your Goals
Understanding your investment goals, risk tolerance, and investment horizon is key to selecting the right Indian investment fund. Here’s a summary to help you decide:
- An interest in investing in India to capitalise on High Growth Potential: If you’re willing to endure some volatility for potentially higher returns and have a long-term horizon, then India-specific risk, India-Focused Equity Funds may be ideal.
- If you have a short-term positive view on India and would like to capitalise on this then an India-focused ETF is simple and convenient and allows you to capture most of the return profile available from investing in the region.
- Moderate Risk with Geographic Diversification: For investors seeking exposure to India without single-country risk, Emerging Markets or Asia Funds, with an India component offer a balanced approach to tap into broader regional growth.
- Global Exposure with Limited India Risk: If you want a globally diversified portfolio with a limited and highly liquid allocation to India, then Global Equity Funds may be more suitable, particularly if you prioritise a lower risk profile.
Getting Started
Investing in India’s growth story is increasingly accessible, with many platforms offering the structures discussed above. However, you should consult your financial adviser prior to doing so.
Some of your options are:
- Invest via a financial adviser / investment platform or wrap
- Complete a Fund PDS (by visiting the issuing fund’s website)
- Invest via the stock exchange (ETF)
