India Funds Offer Investors Potential for Sustained, High Level Growth

 |  Includes: IFN, IIF, INP
by: Brian Powers

India has one of the best potentials for emerging growth over the next few decades. The country is growing fast and requires a great deal of infrastructure over the coming decades to sustain its people.

India is a democracy and has instituted major reforms to attract foreign investment. The country's GDP growth for the quarter ending September, 2007 came in at 8.9%. This was lower than the 10.2% growth achieved in the same quarter last year, but better than the 8.7% economists expected. India's economic growth is second only to China's among the major economies in the world. The Indian government is targeting 9% growth for each of the next five years.

The country, unlike its neighbors, is not pegging its currency, the rupee, to the US dollar and has a current account deficit of about 1% of GDP. India has allowed its currency to appreciate which helps to control inflation for imported commodities. A strong rupee hurts its exporters, but exports are not as large a percentage of GDP as in Eastern Asia and China. India is driven more by internal demand than exports and it is likely to have less exposure if the US economy falls into recession. The rupee is up about 12% versus the US dollar this year. The policies of allowing the rupee to rise may not last forever though and the RBI has occasional bouts of intervention.

This week the World Economic Forum [WEF] met for the India Economic Summit in New Delhi to discuss the country's growing needs. The summit included 800 participants representing over 40 countries. The WEF released a report leading up to the event entitled "India at Risk 2007" (.pdf file).

Highlighted risks include:

  • Economic Impact of Demographics
  • Loss of Freshwater (Quantity and Quality)
  • Economic Shocks and Oil Peaks
  • Globalization vs. Protectionism
  • Climate Change: The Environment and Challenges to India’s Growth
  • Infectious Diseases
  • Emerging Risks

According to the report:

It is clear that India is at an inflection point - the prospect of sustaining 8-10% growth is achievable, but a number of basic challenges are acting as a handbrake on development and need to be addressed. It is well known that the existing infrastructure in India is stretched to its upper limits, and that increased investment is required. But there is also an urgent need for the government, private sector and civil society to collaborate on governance reforms to eliminate corruption and ensure equity in the provision of basic of services such as education, water and sanitation. Finally, much can be gained by removing constraints inherent in inefficient government Bureaucracies, complex tax regulations and labor market rigidities.

Montek Ahluwalia, Deputy Chairman of India’s Planning Commission said India wants to spend $500 billion over the next five years including $150 billion provided by the private sector. The country currently spends 5% of GDP on infrastructure, but wants to increase that level to 9% by 2012. The Asian development bank suggests the need may be as high as 12.5%. Either way, there exists opportunities for investors over many years.

As someone who also researches and invests in water, I found these statistics from the report very interesting:

  • 83-95% of the people in India have access to drinking water, but only 60-65% have ready access to quality drinking water
  • no municipality in India can provide a continuous 24-hour clean drinkable water service
  • only 22% (rural) and 59% (urban) of the population have access to adequate sanitation

India will need billions of dollars for investment in pumps, distribution systems, dams and treatment systems for drinking water.

I have been investing in India through The India Fund (NYSE:IFN) for years. IFN is a closed end fund managed by The Blackstone Group. The current management took over the fund in 1997. This allows me to invest in a country where I would not easily be able to setup a brokerage account. The fund gives me the unique opportunity to have direct exposure to India's equity markets in a Roth IRA account. Further, there is no one single industry I am looking to own in India, I want to own all industries for the long term.

Another closed end fund option is The Morgan Stanley India Investment Fund (NYSE:IIF) which started in 1994. IFN and IIF are similar and trade like ETF's. They are both actively managed funds that invest directly in equities listed in India.

The iPath MSCI India Index ETN (NYSEARCA:INP), a third option, was launched last December. This ETN correlates directly to the MSCI India Total Market Index and is not actively managed, hence, its fees are lower. ETN's trade like ETF's, but they are debt instruments. This means their risk is additionally tied to the viability of the issuing company. For INP, all dividends will be paid out when the ETN matures in 30 years. Additionally, INP may have different tax implications for investors than the other two funds mentioned. As with any investment, you will need to do the proper research to make sure any investment works for your strategy.

There is considerable risk investing broadly in India. The country has grown fast and its infrastructure has not kept pace. While this may create an opportunity, the possibility exists for economic, political and environmental pressures in the future. Emerging markets in general are often quite volatile in the short term. Recently, the three India securities mentioned have had a strong run. Investors looking to open a new position may want to be patient and wait for a dip, or a correction. For investors with a long term strategy though, India may offer the potential for a sustained, high level of growth over many years.

Disclosure: Author is long IFN.

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