How to Invest in India’s Booming Stock Market.

Still, there is plenty for investors to like about India. Prime Minister Narendra Modi is expected to be re-elected this spring. Under his leadership, the country has benefited from economic policy initiatives that include spurring on digitization, creating tax incentives, investing in infrastructure, and attracting foreign investment, several emerging market fund managers tell Barron’s.

“India has been a really good example of what can go right in an emerging market,” says Rahul Sharma, a portfolio manager of the

Cullen Emerging Markets High Dividend

fund. That fund’s India weighting is about 16%.

He credits Modi and the government for “putting together very sound economic development policies.”

India also enjoys some demographic tailwinds, unlike the U.S., Japan, and various developed European countries. It has a huge and relatively young labor force of educated people, many English-speaking—a backdrop that has made the country a favorable place for information technology and pharmaceutical outsourcing, says Sharma.

Kristy Akullian, head of iShares Investment Strategy, Americas, at BlackRock, says she’s “been surprised by the number of questions we’ve gotten from financial advisors who are looking for dedicated India exposure.”

There’s been plenty of interest from institutional investors, including hedge funds, she adds, noting the $9.6 billion

iShares MSCI India

exchange-traded fund is especially popular among those investors. For the 12 months ended in February, that fund’s net inflows totaled $2.6 billion—by far the most of any U.S.-listed India fund tracked by Morningstar.

There are various options for U.S. fund investors interested in India, but they need to consider how much exposure they want and in what type of fund, such as an active or passive vehicle, and an India-only or broader emerging markets fund.

Buying an India-only fund isn’t necessarily the best option.

“I just think people should be aware of the risks,” says Bill Rocco, a senior analyst at Morningstar.

Morningstar recently provided Barron’s with a list of U.S.-listed India-focused funds, most of which are ETFs. The accompanying table includes 12 of those portfolios.

Such ETFs had net inflows of $2.5 billion in the first three months of this year, second only to $3.5 billion for Japan ETFs among overseas countries, according to Bloomberg and Markit.

The ETFs do have a cost advantage. The iShares India ETF sports an expense ratio of 0.65%. The four actively managed India funds on the Morningstar list range from 1% to 1.54%.

But the actively managed fund managers can pick and choose their holdings, rather than hew to an index the way an ETF does.

Among those actively managed funds,

Matthews India

is the largest, with assets of about $830 million. The fund’s recent three-year annual return was 10.7%. That’s better than the

Wasatch Emerging India

fund, which has a 7.5% annual return.

The

ALPS/Kotak India ESG

fund recorded a 7.9% annual return over the last three years. The

Eaton Vance Greater India

fund registered a three-year annual result of 9.6%.

The iShares MSCI ETF has a 9.8% annual return, ahead of those four active funds, though the Eaton Vance fund’s results are very close.

Another concern about investing in India is that stock valuations have gotten stretched as investors bid up those securities.

The MSCI India index fetches 23.2 times 2024 profit estimates, compared with 21.4 times for the S&P 500 and 19 times for the MSCI World Index.

Anuj Aggarwal, co-manager of the

Baron New Asia

fund, which has about a 50% India weighting, says that the stock market there isn’t overvalued. “Given where we are in the growth cycle for the Indian economy and as a market, it does deserve a premium valuation to its peers and for the consistency and durability of earnings,” he says.

The country’s real gross domestic product is expected to grow 7.5% this year and 6.6% in 2025, compared with 7% in 2023, according to consensus estimates compiled by Bloomberg.

Yet Cullen’s Sharma calls India “one of the most expensive emerging markets out there,” adding that he has lightened the portfolio’s weighting to about 16%.

Though Sharma likes the country’s overall prospects, he’s focusing on companies like

Power Grid Corp. of India

and

State Bank of India

—both of which trade at forward price/earnings multiples well below 20.

Another consideration for fund investors, says Morningstar’s Rocco: “You have to check if you already own an emerging market fund” that has exposure to India.

For example, as of Dec. 31 the $77 billion

Vanguard FTSE Emerging Markets

ETF’s India weighting was 21%, second only to China at 28.3%.

There are some emerging market funds to consider as a way to invest in India, including that Vanguard offering. It sports a very low expense ratio of 0.08%.

Another one is the actively managed

GQG Partners Emerging Markets Equity.

Its lead manager is Rajiv Jain, whom Morningstar commends for having a proven record, among other strengths.

As of Dec. 31, the fund was making a big bet on India with a weighting of 35%—more than double its benchmark. The fund’s three-year annual return is 3.4%, placing it in the top 10% of its peer group. Its five-year annual result of 9.8% bests 98% of its Morningstar peers.

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