Accessing India through an efficient, transparent and flexible fund
The Asian Development Bank has forecast that India's middle class will grow to 267 million people in 2016 from more than 160 million people last year, creating a huge market.
This figure was referenced by Ernst & Young in its 2012 India Attractiveness Survey, which notes that direct investors are going to India in search of growth opportunities for their businesses and lower operational costs.
The performance of the Indian stock market bears this out. In the first seven weeks of this year, the MSCI India Index gained as much as 21.5 per cent, making it an outperformer among emerging and developing economies. Throughout the year, it has maintained a 9.9-per-cent gain despite India's economic growth slowing to the lowest rates observed in the past nine years.
In contrast, the FTSE BRIC 50 Index has declined 7.3 per cent over the same period. This global context also applies to economic growth rates.
The IMF World Economic Outlook in April estimated that India will grow at 6.9 per cent this year. This compares with its combined growth estimate for all emerging and developing economies at 5.7 per cent for this year.
India for portfolio investors
As India's middle class continues to grow, opportunities are opened for portfolio investors as well. Both direct investors and portfolio investors seek to balance potential future returns with risk, for which they require capital and good capital management.
Good capital management would involve an understanding of market risks, counterparty risks, economic risks and political risks before investing in a developing economy. However, the difference is that while direct investors might seek to put their businesses to work with the rising Indian middle class, portfolio investors might seek to put their money to work in the performance of Indian businesses that serve the rising middle class.
To achieve this, Singapore portfolio investors can consider investing in exchange-traded funds (ETFs).
Through its listed security products and derivative products, the Singapore Exchange (SGX) currently maintains the largest offshore market for India stock index-based products. The bourse lists for trading a handful of ETFs that enable investors to have portfolio exposure to the broad performance of Indian stocks.
Two of the five ETFs that track Indian indices are issued by db x-trackers; another two are issued by Lyxor and the most popular of the five by turnover, is issued by iShares. These five ETFs track either the MSCI India Total Return Index or the S&P CNX Nifty Index.
Investing in India through exchange-traded funds
ETFs have several intrinsic qualities that make them an appealing choice for investors. While ETF is the defining acronym for exchange-traded fund, ETF is also synonymous with efficiency, transparency and flexibility.
ETFs offer an element of efficiency as broad sector and stock diversification can be achieved in one single transaction.
For example, the iShares MSCI India Index ETF currently consists of 73 stock holdings that are weighed to track the MSCI India Index and a relative small amount of cash and cash equivalents.
These 73 stock holdings are made up of 10 sectors of the Indian stock market: Financials, information technology, energy, consumer staples, materials, consumer discretionary, industrials, health care, utilities and telecommunications services.
Thus, by participating in this one ETF, investors can achieve exposure to all 10 sectors simultaneously.
Participation in these ETFs that track Indian indices is also simplified as it does not require foreign institutional investor approval by the Securities Exchange Board of India. Investors also do not need to repartition and convert funds to establish a long or short position.
ETFs also offer transparency with the availability of price information.
Investors are able to readily access real-time information such as ETF prices, fund information and index information on the websites of the issuers, index provider and the SGX. Market prices are published real-time throughout the trading day.
The management fees of ETFs are also clearly stated.
For example, the management fee of the MSCI India is 0.99 per cent per annum. This is the cost associated with managing and operating the fund including management and trustee fees, but excludes investment costs such as brokerage and access product charges.
Investors should note that with foreign ownership restrictions on certain constituent stocks of the MSCI India, the tracking error of the ETF has potential to be greater than the tracking error of ETFs based on indices that have stocks traded on an open market such as the Straits Times Index ETF.
ETFs also offer flexibility in access. Investors can buy and sell ETFs anytime during trading hours and may employ traditional trading techniques including stop orders and limit orders.
In the case of the iShares MSCI India Index ETF, investors also have the flexibility of choosing to invest in the USD denominated counter or a SGD denominated counter.
*Geoff Howie is a Markets Strategist at Singapore Exchange.
By Geoff Howie*
11 July 2012