How to pick Indian funds

View into the street below Patwa ki Haveli, Jaisalmer, Rajasthan, India — (Image credit: Emad Aljumah)

Investing in India has been popular with investors. Cris Sholto Heaton looks at how to you pick the right tracker funds to gain from its momentum right now.

I’m always cautious about using single-country funds for investing in emerging markets because many of them are heavily concentrated in few companies or sectors. Regional or global emerging-market funds are often a better way to get a well-diversified portfolio.

However, India is an exception, since it’s an unusually deep market. The MSCI India index – which is broader than older benchmarks such as the Nifty or the Sensex – has just 36% in its top ten holdings, which makes it less concentrated than the FTSE 100 (50%).

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Sector diversification is good: financials are around 25%, with a range of others (consumer discretionary, energy, technology and industrials) around the 10% mark. The FTSE India holds more stocks (228 versus 136) and the weights of many of the larger holdings are a bit lower, making it even more diversified in terms of companies (sector weights are broadly similar).

That means a country tracker seems a sensible default option, with the two most popular being iShares MSCI India ETF (LSE: IIND) and Franklin FTSE India ETF (LSE: FRIN). The FTSE India index has a slightly better recent performance, probably on account of its greater exposure to mid-sized stocks. We can’t say if that will definitely continue but the Franklin fund also has a lower expense ratio (0.19% versus 0.65%), so that looks marginally the better choice.

What to look for when opting for Indian funds

Alternatively, we have a choice of four India investment trusts: Abrdn New India (LSE: ANII), Ashoka India Equity (LSE: AIE), India Capital Growth (LSE: IGC) and JP Morgan Indian (LSE: JII). Ashoka has the strongest record over five years, followed by India Capital Growth.

Both have comfortably beaten the market, due in part to their heavy tilt toward smaller growth companies, as well as any value that the managers have added through stock selection (Ashoka has 43% in small caps, India Capital Growth has 50%).

Both New India and JP Morgan Indian have lagged the benchmark, which reflects a greater weight in large caps, plus perhaps a more conservative approach. Certainly, New India explicitly favours large-cap, high-quality stocks, and these tend to lag when markets are as exuberant as India is now.

Therein lies the tricky decision. Valuations for small growth stocks reflect that optimism: the MSCI India Small Cap is on a trailing price/ earnings ratio of 34 – albeit with high forecast earnings growth – while the MSCI India is on 26.

The trusts that have done well on the back of the small-cap boom are very popular with investors. Ashoka trades at a near -2% premium to net asset value (NAV), while India Capital Growth is on a fairly modest 6% discount. In contrast, Abrdn and JP Morgan are on a 17% discount. If you are very bullish the obvious choice is to hold Ashoka or India Capital Growth.

However, if you fear the market is a little frothy but want to back it for the long term, you might expect one of the ETFs to hold up better during pullbacks (see chart above) or favour New India, with its more conservative portfolio and wider discount.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Cris Sholt Heaton is the contributing editor for MoneyWeek.

He is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is experienced in covering international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers.

He often writes about Asian equities, international income and global asset allocation.