Investing in India

04/21/2017 2:50 am EST

Focus: GLOBAL

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

A few years ago, everyone wanted to put money into China. The country's GDP growth was the envy of the Western world, recalls Gordon Pape, editor of Internet Wealth Builder.

That was then. Today, China has fallen out of favor with investors. Economic growth is faltering, business failures are on the rise, and the country faces the potential of a damaging trade war with the U.S.

The new rising star in Asia is India, where NSE 50 Index (nicknamed the "Nifty Fifty") has been rising steadily since the start of the year. The stocks in the index cover a broad range of sectors including energy, finance, infrastructure, automotive, and pharmaceuticals.

The Nifty Fifty has shown a year-to-date gain of 12.4%. That's more than double the 2017 return for the S&P 500 and well ahead of the gains posted Brazil and Hong Kong.

So why are investors in love with India at this point? Basically, because the country has a government that has shown it can get things done to grow the economy. Prime Minister Narendra Modi is regarded as a business-friendly leader who is able to move forward his priorities.

His government recently pushed through a massive overall of the country's clumsy and out-dated tax system and is expected to move ahead with more changes ranging from deregulation to infrastructure spending.

Earlier this year, the country's Economic Affairs Secretary, Shaktikanta Das, predicted that the country will experience economic growth this year of 7% plus.

A UN report put the figure at 7.7% this year and 7.6% in 2018. By comparison, the International Monetary Fund is predicting 6.5% growth for China's GDP this year.

India is also seen as less vulnerable to U.S. protectionism as it does not depend as much on exports as China.
The downside as far as investors are concerned is that India has always been a volatile marketplace, with huge market swings.

The iShares MSCI India ETF (INDA), the largest U.S. based ETF that focuses on the country, was showing a year-to-date total return of 17.9% as of April 6. But the fund posted losses in three of the four years from 2013 to 2016.

This ETF, which has almost US$4.8 billion in assets under management, tracks the performance of MSCI India Total Returns Index. It holds 78 securities. The 2016 management expense ratio was 0.65%.

If you would prefer a fund that is based just on the Nifty Fifty, look at iShares India Fifty ETF (INDY). It's a lot smaller than INDA, with about US$850 million in assets but has a slightly better performance record so far this year at 18.6%. That's despite a much higher expense ratio of 0.94%.

INDY also has a better long-term performance record. As of March 31, it was showing a three-year average annual compound rate of return of 8.4% versus 6.8% for INDA. The five-year figures were 7% for INDY and 5.6% for INDA.

Some small-cap India funds are doing even better this year, with gains of over 30%. The VanEck Vectors India Small-Cap Index ETF (SCIF) is ahead 32.8% this year while the iShares MSCI India Small Cap ETF (SMIN) is ahead 30.2%.

However, these funds tend to be more volatile than the large-cap ETFs so are only recommended for aggressive investors who can deal with the risk. For example, SCIF shows a cumulative loss of 44% since it was created in 2010. Be sure you understand the risks before you invest.

My choice for Canadian investors who want to put some money into India at this stage is the BMO India Equity Index ETF (Toronto: ZID). It tracks the BNY Mellon India Select DR Index, which holds a basket of depository receipts that trade in New York and London.

The result is a much more concentrated fund, with only 15 holdings. The ETF has an excellent track record, with a five-year average annual compound rate of return of 12.6%.

It has been profitable in every year but two since it was launched in 2010. But don't lose sight of the risks. This fund lost 35.4% in 2011, when emerging markets were hammered. It could happen again.

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