Indian investment funds: Inside the market, key risks & how to choose

India is attractive to investors because it’s one of the fastest-growing regions in the world and is packed full of innovative, exciting businesses. But what do you need to know before investing in the country? Here, we consider the various pros and cons and explore how to find the best Indian investment funds for your overall portfolio. New to fund investing? Start with our Learn to Invest hub.

• Indian funds invest in the shares of companies listed on Indian stock exchanges.
• They provide exposure to one of the world’s fastest-growing regions.
• You can invest in open-ended funds, investment trusts and ETFs.
• Indian investment funds are usually seen as satellite positions in portfolios.

What are Indian investment funds?

Indian funds are pooled investments that own shares in companies listed on Indian stock exchanges. They provide UK investors with exposure to a fast-growing economy. In this guide, we focus on UK-domiciled funds investing in the UK, not mutual funds domiciled in India. These are different products with separate regulations. UK-domiciled India funds have their own Investment Association sector. IA India/Indian Subcontinent is for funds investing at least 80% of their assets in this region.

Why UK investors look at India

India is one of the world’s fastest-growing regions. According to Goldman Sachs, it’s projected to enjoy real GDP growth of up to 7% over the next few years. The long-term drivers include digitisation, infrastructure demand and favourable demographics. The country is home to 1.4 billion people, and its middle class is expected to increase significantly. Because of this single-country focus, an India fund is usually one just one part within a wider strategy, see our guide on how to build your investment portfolio.

How UK investors can access India

There are various ways to make an investment in India:

• Open-ended Indian funds (OEICs): actively managed portfolios whose managers are free to choose individual holdings. These funds are available on most UK platforms.
• Indian investment trusts: closed-ended vehicles listed on the London Stock Exchange. Their structure enables them to use gearing to amplify returns.
• Indian exchange-traded funds (ETFs): these typically track a particular Indian benchmark. They offer broad exposure and are a cheaper alternative to active management. However, they can’t outperform.

Alternatively, you can opt for a diversified global emerging markets fund or global fund that already has exposure to India. The amount it has invested in the country will be listed on its factsheet.

Indices and what’s typically inside an India fund

There are several benchmarks used by Indian investment funds. The most widely quoted is the Nifty 50. This tracks the 50 largest companies on the National Stock Exchange. It’s similar to the S&P 500 in the US. The standard benchmark for most international investors is the MSCI India Index. This covers a broader mix of large and mid-cap names There’s also the BSE Sensex, an older benchmark that features the 30 largest companies listed on the Bombay Stock Exchange. Finally, the FTSE India index is an alternative market-capitalisation-weighted benchmark that features many of the largest and most liquid Indian companies.

Sub-categories within India funds

Indian investment funds can differ in terms of their focus. Here we look at some of the main sub-categories.

All-cap funds

These invest in companies of different sizes. Their managers can consider large, established blue-chip stocks, as well as smaller, developing businesses.

Indian smaller companies / mid-cap funds

The benefit of investing in smaller companies is enjoying higher growth potential from businesses that may not be as closely followed as large-cap names. However, this can also make them riskier.

Indian Subcontinent funds

These funds have a slightly broader brief. Alongside India, they will consider companies from neighbouring countries such as Bangladesh and Pakistan.

Thematic India funds

You can also find Indian funds that invest in themes. These may include technology, infrastructure, healthcare or financial services. It enables you to tailor your exposure.

The biggest risks to understand

Single-country funds can be riskier, as returns depend on that country’s equity market, economic backdrop, and geopolitical issues. There are also other concerns:

Valuation risk

The values of Indian companies can be affected by investor enthusiasm. When this is strong, share prices can be pushed higher. Conversely, when markets are nervous, valuations can tumble.

Currency risk

The share prices of companies will be priced in Indian rupees. That can cause issues for UK investors as returns will be affected by exchange rate movements – as well as the usual stock market volatility. Some funds use currency hedging to eliminate this risk, but it may not always be the best approach and is often more expensive.

Volatility and concentration

A major risk for Indian funds is their concentration in one country. It means that stock valuations can fluctuate due to political or economic issues. Some Indian investment funds can also be concentrated in a relative handful of sectors. That’s why it’s important to understand where and how they are invested.

Regulatory and political risk

Government policy and geopolitical issues can affect stock markets and returns generation. This means price movements may not always be due to changes in business fundamentals.

Retail trading volatility

There’s been an increase in domestic retail investing over recent years. This has broadened the investor base and contributed to periods of heightened market volatility.

Active vs passive in India

Passive funds track certain benchmarks, such as the Nifty 50. While they are cheaper than active funds, their performance will only reflect the benchmark followed. Active funds, meanwhile, are more expensive for investors, but their managers will have greater freedom to find companies they believe will outperform.

How to choose an Indian fund

Here we look at how to find the best Indian investment funds.

Define your objective

What are you trying to achieve? For example, do you want exposure to growth stocks or another revenue source? Do you want Indian funds to be a core holding or a satellite position?

Check the market-cap mix

Not all Indian investment funds invest in the same companies. Some focus on large-market-capitalisation companies, and others on smaller businesses. All-cap funds embrace all sizes.

Choose the right vehicle structure

The ideal structure will depend on your attitude to risk and your investment goals. For example, the price of open-ended funds is usually based on the value of their underlying holdings. Investment trusts, are traded on the stock market and may trade at a premium or discount. ETFs, meanwhile, provide intraday trading and are usually lower cost.

Assess the manager and team

We believe the managers at the helm of Indian investment funds are very important. The returns you enjoy will largely depend on their expertise and abilities. That’s why you must choose wisely. Look into their experience in managing Indian investment funds in different market conditions. Do they have a strong track record or is it patchy? The resources backing them are also important. Are they supported by a large fund management business, or is it more of a niche operation?

Review costs and currency policy

Fees have a significant impact on your returns. The charges levied by Indian investment funds can vary, so you must be clear on what costs apply. Pay attention to the Ongoing Charge Figure (OCF), which is a percentage representing a fund’s annual operating costs, the entry and exit charges, transaction costs, and any performance fees.

Where Indian funds fit in a portfolio

It depends on your investment goals, attitude to risk and existing holdings. However, most UK investors usually regard Indian funds as satellite positions in a broader portfolio, rather than core holdings.

Our process & how we select Indian funds (Elite Rated)

FundCalibre can help you identify the best Indian investment funds to meet your needs. Our experts have been analysing Indian investment funds for many years. Their research starts with AlphaQuest, a proprietary quantitative screening tool that estimates the likelihood that a fund manager will deliver superior returns. Indian funds passing this test will be quizzed on their investment philosophy and portfolio construction approach. This analysis will be subject to peer review before a decision is made. Only the very best Indian investment funds will be awarded a prestigious Elite Rating, denoting that they have a skilled manager, a repeatable investment process and a history of consistent long-term returns.

FAQs about Indian investment funds