Promise of an Indian spring for investors

If there is such a thing as a sure bet in life, surely investing in India is it.

The economy is coming up on the rails of China and even the US, and it has a young, dynamic population, with a tech and science base that's becoming the envy of the world. The 20th century was America's, yet the 21st may turn out to be India's, and not China's after all.

However, any private investor with money in an India investment fund over the past 12 months will be counting the cost: "The last year has not been a good one in the emerging markets for investors, but worst of the lot has been India," says Edward Bland, head of research at Duncan Lawrie.

"The Indian stock market is down 25 per cent, and there is a similar drop in the value of the rupee against the dollar, which shows the perceived weakness of the economy and eats into returns for people looking to repatriate an investment," Mr Bland said.

A quick scan of the funds that invest in India reveal that over the past year the best performing, the First State Indian Subcontinent fund, has still managed to decline by 22.8 per cent, and the worst, HSBC GIF Indian Equity fund, has lost a whopping 43.6 per cent. Compared with a 5.5 per cent fall in the UK FTSE in 2011, this is a scale of loss which should give investors – big and small – pause for thought.

Against this backdrop, institutional investors – such as pension and investment funds – have been rapidly selling Indian company shares, driving the market further down.

Now, in response, the Indian government is to make good on its promise to allow foreign private investors to make direct investments into Indian companies. Previously, only unit trusts and pension funds were able to invest, but from 15 January you and I will be able to invest directly. But with institutional cash still running for the hills, should private investors resist India's new-found conversion to open economics?

"There has been to-ing and froing from the Indian government over liberalising its economy and accepting foreign direct investment in companies, and this has spooked the institutions," says Tom Stevenson, investment director at the giant fund management group Fidelity.

"There have also been problems with the economy, in particular inflation – largely from higher food prices. This has led to a 4 per cent rise in interest rates and tailing off of economic activity in some quarters," he adds.

However, such bad news could also be the signal to invest in what long-term still looks like a success story: "It's a very young population and it is rapidly urbanising, like China, and, unlike the West, has very low levels of household debt," Mr Stevenson says. "There is an entrepreneurial culture in India – a pent-up desire for growth hemmed in by bureaucracy. After a torrid 2011, share price valuations in Indian companies look very attractive and corporate profits healthy."

As for the banking sector, which has sparked some concerns, this is apparently in good health, particularly when compared with the West.

"There appears to be a significant concern, if valuations are a guide, that Indian banks could suffer unsustainable losses as a result of the slowdown. This is highly unlikely. Bank balance sheets in India are reasonably robust compared with most banking systems in the world today," Avinash Vazirani, the manager of the Jupiter India Fund says.

What's more, the majority of India's still largely rural population do not have a bank, which means that long-term consumer credit and other banking services are set to grow. Meanwhile, transport, utilities and public building projects are all harbingers of immense growth: "India is modernising fast, and there is infrastructure roll-out which the Chinese have already undergone," Mr Bland says.

As for the bugbear of inflation, which helped to prompt the Indian share sell-off last year, this is easing.

"Food inflation is already at the lowest level for four years, and should decrease further in the next few weeks. I expect inflation to continue to reduce as energy and food price falls feed through, which should allow the Reserve Bank of India to cut rates significantly this year," Mr Vazirani adds.

But direct investment in Indian firms for small private investors may be tricky to undertake, relatively more expensive than deals in the UK and crucially high risk, as single company shares are far more volatile than buying a basket of shares through a unit trust or an exchange traded fund.

"It's best for most small investors to look at funds rather than direct investment as these help spread risk," says Darius McDermott from Chelsea Financial Services. "As a rule of thumb we wouldn't recommend investors have more than 5 per cent of a share portfolio in the Indian stock market, and less than this – or not at all – if you are, for example, nearing retirement and have a short- to medium-term investment timeframe.

"For investors wanting a pure India play, we would recommend the Fidelity India Focus fund. The manager, Teera Chanpongsang, is someone who has impressed us. For those wanting more diversification, we would recommend the Allianz RCM BRIC fund, Aberdeen Emerging Markets fund or one of the new funds from JOHCM which look very promising."

Expert View

Tom Stevenson, Investment director, Fidelity

"As long as you remember that investment is for the long term and remember that emerging markets can be very volatile then the prospects for India are exciting. The economy is fundamentally quite strong and it has a very young demographic. Bearing this in mind, valuations look very good right now, near the level we saw at the nadir of the last global recession."