The empirical evidence of India’s enormous economic expansion in recent years—in particular the sharp run-up in stocks—has proven an irresistible draw to some mutual fund investors.
But those chasing the siren song should be aware that, as with any developing economy, there could be bruising stumbles, say fund managers.
“If you have a car speeding along and it hits a speed bump, the aftershock is going to be that much greater the faster the car goes. India is going to hit some speed bumps as it goes,” said Andrew T. Foster, director of research at Matthews International Capital Management LLC, a San Francisco fund manager specializing in Asian investing.
“The Indian growth story is continuing be reaffirmed,” said Dhruva Raj Chatterji, a research analyst in Mumbai, for fund-tracker Lipper Inc.
“It has been a sustained bull run for the past three years because of which India is one of the most expensive markets in the world. Valuations are kind of the higher side,” Chatterji said.
He questioned whether the market has over-estimated how much Indian companies will continue to earn. Earnings growth has in recent years hovered near the breakneck pace of more than 20%.
Despite lingering questions, Chatterji noted good growth figures helped the markets turn in a decent performance last month.
Equity funds registered for sale in India rose 29.2% in past 12 months, while the Bombay Stock Exchange Sensex was up an even larger 42.1%. Chatterji said the amount of money foreigners invested in the country also slowed in January.
“People are thinking about whether foreign fund flow will continue with the same vigor as it has in the past.”
Subodh Kumar, chief investment strategist for CIBC World Markets, contends investors should consider interest rates before investing in India.
“I believe that, looking at mutual funds in India, the long-term story is intact, but I would wait until it’s clear that the central bank has finished raising rates,” he said.
“A lot of the speculative activity that was in the Indian market is coming out of the market.”
Still, funds for the US investors continue to show growth. The Matthews India Fund, for example, with assets of about $718 million (Rs3,159 crore), has shown a year-to-date return of 2.14%.
Chatterji is concerned stocks, and therefore the mutual funds that invest in the country, could face difficulty later in the year because the number of initial public offerings has increased sharply in the new year. The enthusiasm of investors looking to snag their share of the Indian market risks depleting how much money will be left for investment later, he said.
“Whenever there has been a correction in India, there has been tremendous buying support,” he said.
He credited investors’ long-term faith in the potential of the giant and rapidly industrializing country. “But in 2007, it’s definitely going tobe volatile.”