In a previous article, we discussed why American investors should be interested in Indian ADRs. One reader asked us how one could invest in an Indian stock - like the giant Reliance Industries - that does not have ADRs. This article shows how non-Indian investors can invest in the Indian stock market outside of the ADR route.
Although the Indian economy has liberalized in the last two decades, investing directly in the Indian stock market was off-limits for foreign individual investors until recently.
Indian policymakers adopted a semi closed policy for foreign investment in Indian capital markets to prevent a crisis like the one that happened in South East Asia in 1998 due to overexposure to western investment.
One way to invest in Indian stocks has traditionally been to go the ADR route; unfortunately, some of the largest and best Indian companies like Reliance and SBI do not offer ADRs. To invest in these companies, one method is to invest in India centered mutual funds and ETFs which usually have stakes in non-ADR Indian companies. A third route, recently opened, is to apply for Qualified Foreign Investors (QFIs) status and invest directly in the Indian market. We will discuss the mutual funds and ETF route, and briefly touch upon the QFI option.
How to Invest in Indian Companies Without ADRs:
A) Exchange Traded Funds
24 of the 30 companies in the BSE SENSEX do not have their ADRs listed on U.S. exchanges. However, many US-based mutual funds and ETFs have stakes in these companies, and investing in these funds can be a good way to diversify into the Indian market.
Foreign institutional investors (FIIs), which include mutual funds and ETFs, have poured in billions of dollars into Indian stock markets in the past decade. Individual investors gain exposure to the Indian stock market through FIIs, specifically mutual funds and ETFs.
Investors seeking exposure to the Indian stock market can look at some India-focused ETFs. The following performance analysis chart will help you select your preferred ETF:
*iShares Russell 2000 Index (NYSEARCA: IWM)
Overall, iShares S&P India Nifty 50 Index Fund (NASDAQ: INDY) has been the best performing India-focused ETF. It gained the most in the last 3 months and YTD, and lost the least in 1 year.
INDY seeks investment results that correspond generally to the price and yield performance of the S&P CNX Nifty Index (the Index). Year-to-date, INDY is up 11.49%.
Another ETF that has done reasonably well is the WisdomTree India Earnings Fund (NYSEARCA: EPI): The fund seeks to track the price and yield of the WisdomTree India Earnings Index. Year-to-date, EPI is up 9.29%.
Details about other ETFs listed here:
Market Vectors India Small Cap Index ETF (NYSEARCA: SCIF): The fund seeks to replicate the price and yield performance of Market Vectors India Small Cap Index. Year-to-date, SCIF is up 10.94%.
PowerShares India Portfolio (ETF) (NYSEARCA: PIN): The fund is based on the Indus India Index and is designed to replicate the Indian equity market as a whole. Year-to-date, PIN is up 4.36%.
B) The Mutual Fund Route
Goldman Sachs Equity India (MUTF: GIAAX) has been the best performing mutual fund. The fund has outperformed the benchmark indexes in the last three months and year-to-date.
JP Morgan India Fund A (MUTF: JIDAX) and BlackRock India Fund (MUTF: BAINX) are two other mutual funds that have also done well.
C) Qualified Foreign Investors
On January 1, 2012, the Indian government allowed Qualified Foreign Investors (QFIs) to invest directly in the Indian stock market. The decision was taken to boost capital inflows.
Who is a QFI?
QFIs can be individuals, groups or associations based outside India. QFIs can invest in Indian Mutual Fund schemes and directly in the Indian stock market.
The individuals, groups or associations should be resident of a country that is a member of the Financial Action Task Force (FATF, of which the USA is a member) or a country that is a member of a group which is a member of FATF. QFIs should also be residents in a country that is a signatory to IOSCO's MMOU or a signatory of bilateral MOU with Securities and Exchange Board of India (SEBI).
For more information on QFIs click here. This document provides every detail you need to know to begin investing directly in the Indian stock market.