Sunday, August 20, 2006

Investing in India - Mutual Funds - Revisited

We looked at investing in emerging markets a few times in this blog. In particular, we have looked at India, China, Korea and Brazil. We have written quite a few articles about India including the one on Indian mutual funds. In this segment, we will look again into funds that a US based investor can access to invest in India.

First a view of Indian economy. India is predicted to grow around 7% or higher this year and next. India's exports and imports are expected to grow in the 20% range for the next two years. India's trade with US is also growing at a fast double digit rate but is miniscule compared to China. The total US trade with India was about 27 billion dollars in 2005 and it is expected to cross 30 billion dollars in 2006 with about 15-20% growth. This is still small compared to the US trade with China which offers a lot of room for growth.

To compare the charts of SP500 vs BSE Sensex index, please click on the following link. The difference between the two indices is close to 80% with the winner being BSE Sensex. Despite the down draft and lack of investor enthusiasm for emerging markets after some mid summer drop, it is a safe bet that the emerging markets such as India provide more upside than the U.S market in the next several years.

To assess the funds, we will follow a similar formula as the last article where we look at each of the funds, their holding, premium/discount to market value and expense ratio.

EEM is the iShares emerging market fund and has returned about 9% YTD. If one bought the ETF at the low 80's in the second quarter, the ETF has returned more than 20%. EEM has an expense ratio of 0.77% and has performed better than VWO thus far this year. EEM has 5% exposure to India.

VWO is the Vanguard emerging market fund and has returned about 7.5% YTD. This correlates highly with EEM but has a lower expense ratio of 0.3%. VWO has a 7% exposure to India.

IFN is currently trading at around 9.6% premium to the market price. This is down from the 28% premium it was trading to the market the last time we profiled this fund. IFN has returned 4.8% in 2006 till 7/31/2006. The expense ratio for IFN is about 1.5% excluding trading costs. The main holdings of IFN are

Infosys Technologies, Ltd.
Bharat Heavy Electricals, Ltd.
Oil and Natural Gas Corp., Ltd.
Reliance Industries, Ltd.
ITC, Ltd.
Tata Motors, Ltd.
Housing Development Finance Corp.
Hindustan Lever, Ltd.
Bharti Tele-Ventures, Ltd.
Satyam Computer Services, Ltd

IIF was trading for a premium of about 8% when we looked at this fund the last time. This time around, the situation is much better with the fund trading at around 3% premium to the market price of the underlying securities. Also, IIF has a smaller YTD gain of about 3% ( as of 7/31/06 ) compared to IFN. The expense ratio for IIF is about 1.4% excluding trading costs. The main holdings of IIF are:

Bharat Heavy Electricals
Siemens India Ltd
Hindustan Lever Ltd
ABB Ltd India
Infosys Technologies Ltd
Hdfc Bank Ltd
Hindustan Construction Co.
Associated Cement Co. Ltd
Housing Development Finance Co

MINDX - Mathews India Fund is a relative new comer to the block. The fund has returned 0.18% YTD. The fund carries an expense ratio of 2.75% and the top holdings of the fund as of 7/31/06 were as follows.

Dabur India
Ashok Leyland
HDFC Banking
Infosys Technologies
Housing Dev. Finance Corp.
Gail India
Sun Pharmaceuticals Industries
I Flex Solutions

ETGIX can be called a wealthy persons India fund. It has an initiation fee of 5.75% for small sums of money that declines to zero if the capital is greater than a million dollars. This is not targeted for individual investors but is targeted more towards institutional investors that want an exposure to India. The fund also has an expense ratio of 2.75% on top of the initiation fee.
Interestingly enough, ETGIX had a return of 5.6% as of end of July. The top holdings for ETGIX at end of March were:


Analysis It is interesting to note that the BSE Sensex index returned about 7% this year but none of the mutual funds have been able to keep pace. In fact, indexing is probably the best approach to India. If one has to get into the Indian market, IIF might be a good bet on a down day. It still is trading about 3% above the NAV but has a lower expense ratio than MINDX. Other than these funds, the traditional emerging market ETFs VWO and EEM are also available. VWO has a lower expense ratio than EEM and both the funds are well diversified amongst the emerging markets of the world. It is our hope that we will see an India ETF soon which will mimic the BSE Sensex index in the U.S markets.

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