India Funds: Worthy Investment Or Risky Business?

India is a budding economic superpower with a rapidly growing population and strong economy. In the past decade, it has gone from the tenth largest economy to the seventh and is forecast to be the third largest by 2030. The country has a youthful, educated, and growing workforce, with more than 85% of people below the age of 55. It also ranks second worldwide in farm output and 12th in nominal factory output. India's presence in the UK is also notable, with the country being the third biggest source of foreign investment in Britain. However, it's important to consider the risks associated with investing in India, including geopolitical instability and civil rights issues.

India's economic growth and potential

India is a budding economic superpower, with a rapidly growing population and strong economy. By 2030, it is forecast to be the world's third-largest economy, behind China and the US. In the past decade, it has already jumped from the tenth to the seventh-largest economy in the world.

India has a gross domestic product (GDP) of $3 trillion and a growth rate of 6.8%. By 2025, it is expected to become the world's fourth-largest economy, overtaking Japan with a nominal GDP of $4,340 billion. The International Monetary Fund (IMF) predicts that by 2027, India will become the world's third-largest economy, surpassing Germany.

The country's workforce is growing faster than any other in the world, and it is a young population, with more than 85% of people below the age of 55. Over 41% are between 25 and 54 years old. This youthful, educated population is a positive demographic for sustaining economic growth.

India is known for its information technology and business process outsourcing, ranking second worldwide in farm output and 12th in nominal factory output. These industries have pushed the country to third in the world based on purchasing power parity (PPP).

India's economic success is giving it more regional leverage. As China struggles to return to pre-pandemic growth levels, India's Prime Minister Narendra Modi has been offering financial aid to neighbouring countries to counter China's influence. For example, India provided over $4 billion in aid to Sri Lanka during its economic crisis in 2022.

However, it is important to be aware of India's geopolitical risks before investing. The country is located in a shaky region, with a history of terrorist attacks, and there is a possibility of social upheaval as women and people fight for their rights.

The benefits and risks of investing in India

India is a budding economic superpower with a rapidly growing population and strong economy. By 2030, it is forecast to be the third-largest economy in the world, behind China and the US. So, what are the benefits and risks of investing in India?

Benefits

• Positive Demographics: India has a youthful, educated, and growing workforce that can support economic growth. Over 85% of the population is below the age of 55, with more than 41% between 25 and 54 years old.
• Strong Economic Growth: India has a strong growth rate, particularly in the information technology and business process outsourcing sectors, which are still the largest sectors of the global economy. In 2019, India had a gross domestic product (GDP) of $3 trillion and a growth rate of 6.8%.
• Stable Government: India has maintained a democratic parliamentary system since gaining independence from British rule over 60 years ago. The current prime minister, Narendra Modi, and his policies have made good progress in recent years.

Risks

• Geopolitical Instability: India is located in a region with a shaky geopolitical environment and has experienced numerous terrorist attacks. While these attacks have not derailed the economy, they create short-term risks that should be considered.
• Civil Rights: There is a potential for social upheaval as women and people of the country fight for their rights, which could impact the country's stability.
• Market Challenges: Investing in the Indian market is not straightforward. Most Indian indices use a stock's market capitalization to decide its weight, which means stocks with the biggest market cap get the highest weight. This can reduce exposure to stocks that are undervalued or experiencing temporary pessimism. Additionally, strategy-based indices in India may suffer from limitations in construction, such as including stocks that do not fit the intended criteria.

In conclusion, investing in India offers potential benefits due to its positive demographics and strong economic growth. However, it is important to carefully consider the risks, including geopolitical instability and the challenges of navigating the Indian market.

The best ways to invest in India

India is a budding economic superpower with a rapidly growing population and strong economy. By 2030, it is forecast to be the third-largest economy in the world, behind China and the US.

Exchange-Traded Funds (ETFs)

ETFs are a great way to access the Indian market without worrying about the legal and tax issues of buying American Depository Receipts (ADRs) and foreign-traded securities. They are also a low-cost way to invest in a broad market index.

Some popular ETFs include:

• WisdomTree India Earnings Fund ETF (NYSE: EPI)
• IPath MSCI India Index ETN (NYSE: INP)
• Invesco India Portfolio ETF (NYSE: PIN)
• IShares S&P India Nifty 50 Index Fund (NASDAQ: INDY)
• Market Vectors India Small-Cap Index ETF (NYSE: SCIF)

American Depository Receipts (ADRs)

ADRs are another way to buy shares in Indian companies, but ETFs may trigger fewer taxes.

Some popular ADRs include:

• Tata Motors Limited (NYSE: TTM)
• ICICI Bank Limited (NYSE: IBN)
• Dr. Reddy's Laboratories Limited (NYSE: RDY)
• Infosys Ltd. (NASDAQ: INFY)
• Rediff.com India Limited (NASDAQ: REDF)

Mutual Funds

Mutual funds are a common pool of money invested in multiple assets like stocks, bonds, etc. They are a good way to diversify your investment portfolio and mitigate risk.

Fixed Deposits (FDs)

FDs are one of the most popular investment options in India. They are offered by banks, post offices, and Non-Banking Financial Companies (NBFCs) and are suited for lump-sum investments with decent returns.

Gold

Gold is considered an auspicious metal in India and is a traditional and popular investment option. It acts as a hedge against inflation and is a low-risk investment.

Real Estate

Investing in real estate is a popular option in India, offering huge returns. It can be considered a good investment option for the long term.

Bonds

Bonds are considered a low-risk investment option, especially when they are government-backed.

India's geopolitical risks

Geopolitical Instability

India is located in a region that has experienced various terrorist attacks, and while these have not derailed the economy, they do create short-term risks that can impact investment. The country is also in close proximity to the ongoing Russia-Ukraine conflict, which has created broader geopolitical risks and economic disruptions.

Civil Rights Issues

There is a potential for social upheaval as women and people of the country continue to fight for their rights. This could lead to social and political instability, which may have economic implications.

Impact on Foreign Direct Investment (FDI)

Geopolitical risks can negatively affect FDI, as investors may postpone investments or seek higher returns due to increased uncertainty. However, strong economic growth can sometimes compensate for the risk, as seen in India during 2014-2016.

Supply Chain and Trade Disruptions

Geopolitical considerations can lead to the reshaping of global supply chains, increasing costs and reducing trade flows. This can impact India's economy, particularly if there are disruptions to key inputs or supply chokepoints.

Market Volatility

An increase in geopolitical risk is often accompanied by higher market volatility and lower equity returns. While this volatility may be short-lived, prolonged geopolitical stress can result in reduced foreign capital inflows and impact equity returns over a longer period.

It is important for investors to carefully consider these geopolitical risks when evaluating investment opportunities in India. While the country offers strong growth potential and a young, educated workforce, the geopolitical landscape can introduce complexities and uncertainties that may impact investment decisions and outcomes.

India's stock market performance

India's Economic Growth and Potential:

India has a rapidly growing population and a strong economy, with a gross domestic product (GDP) of $3 trillion and a growth rate of 6.8%tenth to the seventh-largest economy in the world and is forecast to become the third-largest by 2030, behind only China and the US. This growth is fuelled by a young, educated workforce and strong sectors such as information technology and business process outsourcing.

Stock Market Indices:

India's two main stock market indices are the Sensex and the Nifty 50. On Friday, 30 September 2024, the Sensex declined by 0.31%, while the Nifty 50 settled 0.14% lower. However, these indices had reached record-high levels before this decline, and the Nifty 50 was trading at around 26,315 on the same date, indicating a weak start for the Indian stock market.

Benefits of Investing in India:

India offers positive demographics with a youthful and educated workforce that can support long-term growth. It also has strong economic growth, particularly in key sectors such as information technology and business process outsourcing. Additionally, India has a stable parliamentary democracy and liberal economic policies, making it a safer investment choice compared to some other emerging markets.

Risks of Investing in India:

One of the main risks of investing in India is geopolitical instability. India is located in a region that has experienced terrorist attacks, creating short-term risks for the economy. There is also a possibility of social upheaval as women and marginalised groups fight for their rights. These factors can impact the stock market performance and should be carefully considered when making investment decisions.

In summary, while India offers strong economic growth and favourable demographics, investors should carefully weigh the benefits against the risks posed by geopolitical and social factors that could influence stock market performance.

Frequently asked questions