Sunday, October 01, 2006

Overview of Indian Markets and Funds

We have looked at emerging markets and BRIC stocks quite a few times in this blog. We will look at the Indian economy, the returns in BSE Sensex thus far this year and look at the India funds and the outlook for the sector in the coming several months.

First an outlook of the Indian economy. The Indian economy was expected to grow at ~7% rate this year and next. This is higher than the world wide economic growth prediction of 5.1% and 4.9% repsectively for this year and next. Financial Times reported that Indian economy grew at the rate of 8.9% in the first quarter of 06-07 fiscal year. This was above the analysts estimates of 8.5% growth. The inflation rate is going around 5-5.5% and the RBI is expected to increase the interest rates to 6.25% as a result. The interest rates are already much higher than that in China.

The Wallstreet Journal reports that the BSE Sensex Index has grown by 32.5% this year and on the average sports a P/E of 21. Of all the stock markets in the world, the Chinese and Indian markets are on the higher end of the valuation spectrum with a P/E of 21.

The prognosis for Indian economy is good and the economy is expected to grow at around 8% for the next three-four years. India runs a trade deficit with the rest of the world like the U.S. India has a very high degree of domestic consumption unlike the other Asian Tigers whose economy is propelled by export to the United States. At this rate of growth, the Indian companies will probably continue to grow at very fast rates making the current P/E not that high.

Now, let us take a look at India funds. We start by looking at the generic emerging market funds and then look at Indian funds in particular.

EEM is the iShares emerging market fund and has returned about 9.7% 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%. EEM has approximately 5% exposure to India.

VWO is the Vanguard emerging market fund and has returned about 10.3% YTD. This correlates highly with EEM but has a lower expense ratio of 0.3%. VWO has a 7.1% exposure to India and it has done better than EEM recently.

IIF is Morgan Stanley India Investment Fund, Inc. is a non-diversified, closed-end management investment company. The Fund's investment objective is long-term capital appreciations, which it seeks to achieve by investing primarily in equity securities of Indian issuers. The Fund will invest at least 65% of its total assets in equity securities of Indian issuers; which for this purpose means common and preferred stock bonds, notes and debentures convertible into common or preferred stock, stock purchase warrants and rights, equity interests in trusts and partnerships and American , Global and other types of Depositary Receipts. The Fund may invest up to 25% of its total assets in unlisted equity securities of Indian issuers.

Currently IIF sells for about 2.48% premium to the net asset value. The management fees for this stock is 1.27%. The total return of IIF is 14.2% compared to the BSE Sensex Index return of 32.5%.

IFN India Fund is a closed-end management investment company. The fund seeks long-term capital appreciation through primarily investing in the equity securities of Indian companies. The fund will invest at least 80% of its total assets in the equity securities of Indian Companies. The management fees for this stock is 1.47%. The fund has returned 8.2% compared to the BSE Sensex index of 32.5%.

MINDX Mathews India Fund is a relative new comer to the block. The fund carries an expense ratio of 2.75% has returned 18.82% YTD.

ETGIX 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. This fund has returned 19.67% YTD.

EEB ( Claymore/BNY BRIC ETF ) - This is a new ETF targeting only the BRIC countries - Brazil, Russia, India and China. The fund doesnt have the assets divided equally with all the four countries but it only specializes in these four emerging markets. The fund carries an expense ratio of 0.65% and returned 3% since inception.

Although both India and China look expensive at the moment compared to other markets, the growth in these markets make it look as though there is still upside for these companies.

1 comment:

Vikas said...

I hold a good number of IFN (India Fund) shares, and have been really confused by how this "thing" operates.

I dont understand why its at a 10% premium to its NAV?

If you chart the performance of IFN, IIF and ^BSESN on Yahoo charts for year to date, it lags both IIF and the BSE, but its still at a premium.

What is the "real" expense ratio? If you look at its income statement on, there is a G&A expense of $2M and a 'Cost of Revenue' expense of $11M on revenue of $380M. Is the expense ratio calculated using only the G&A or both the above?

Is there a BSE index ETF equivalent in India or a fund similar to the Vangaurd 500 with low expenses in India so NRI's can transfer $$ to India and purchase it there?

I am confused and making $$ on the IFN, but would like to learn more. Why buy IFN vs ETGIX or MINDX or IIF?