Investing in India: how to profit from the world's most populous country

For those with globally diversified portfolios, investing in India has become more important than ever. India is one of the world's fastest-growing economies, with a growing middle class, a young and educated workforce, and a rapidly expanding digital economy. Recently it also became the most populous country on earth. But what is the best way for investors to take advantage of this remarkable growth story? As ROBIN POWELL explains, investing in India calls for patience and discipline.

2023 has been such a dramatic year that one the most significant landmarks in modern history may have passed you by. Projections by the United Nations in April showed that India has overtaken China as the world’s most populous country, with an estimated 1.425 billion inhabitants.

It’s the first time since 1950, when the UN first started recording global population, that China has lost the top spot.

India also has one of the world’s fastest-growing economies. Last year it overtook the UK as the fifth biggest economy on the planet. By 2030 economists expect it to move past Germany and Japan into third place, behind the US and China.

It’s not surprising, then, that we’re seeing more and more articles in the media suggesting that India provides a real opportunity for investors.

According to data compiled by the Investment Association, India-focused funds have seen large month-on-month inflows over the course of this year. The IA says there are currently around £4 billion invested in UK retail funds focused on India and the Indian subcontinent.

The investment company Franklin Templeton recently cited several compelling reasons for investors to consider increasing their exposure to Indian equities. Structural economic trends, rising affluence, expanding manufacturing prowess, government reforms and India’s burgeoning influence on the world stage, it said, were all positive indicators.

One analyst told the FT last week that India was a strong long-term investment. Although he acknowledged that share prices in India are higher than in other emerging markets, Henry Ince from Hargreaves Lansdown said that “India offers an array of advantages, including improved corporate governance standards, favourable global sentiment, and growing foreign direct investment. “ He added: “Corporate balance sheets have also strengthened significantly over the past decade.”

Is now a good time for investing in India?

It’s clear that, in the long run, India’s economy looks set to grow faster than most others. In that respect, yes, it does provide investors with an opportunity. But how should investors seek to profit from India’s growth story?

Here at rockwealth, we believe that markets are broadly efficient. In other words, current prices reflect all available information. In the case of India, it has been widely known for a long time that India was emerging as an economic superpower. It hasn’t just suddenly happened. So in other words, Indian share prices today already reflect the fact the country’s economy is on an upward trajectory.

Investors who think they’re smart by heavily investing in India just because they’ve heard it’s expected to be the world’s third largest economy within the next few years are simply acting on information that market participants around the world already know about.

Something else we at rockwealth believe is the value of learning from financial history. As Mark Twain once said, “history doesn’t repeat itself but it often rhymes.” Financial history doesn’t tell investors what to expect, but it does provide some useful pointers.

For example, in the latter stages of the nineteenth century, it became increasingly clear that the US was going to overtake the UK as the biggest economic power in the world. But it actually took longer to happen than many experts had predicted. Even after it did happen, the UK stock market continued to outperform the US stock market for quite some time.

Another cautionary tale for investors is what happened to the Fidelity China Special Situations Fund. The fund was launched in 2010 and was managed by the well-known stockpicker Anthony Bolton, who had enjoyed a largely successful career running the Fidelity Special Situations Fund.

At the time, Bolton hailed China as the "investment opportunity of the next decade”, but, for the next few years, the Chinese stock market performed poorly. China funds delivered the worst returns of any sector at a time when stock markets in the UK, the US and elsewhere performed very strongly. Bolton handed over the management of the fund in 2014, with his professional reputation somewhat blemished.

Don’t try to time your entry

What these examples teach us, in short, is that trying to time the market is not a good idea.

As an investor, you can be completely right to have a certain conviction, and yet get your timing totally wrong and lose money. Yes, at some stage over the next 20 or 30 years, the overwhelming likelihood is that India will become an economic superpower, but nobody knows when will be the best time to invest.

Also bear in mind that emerging markets such as India can be extremely volatile. Prices can rise and fall very sharply in a short space of time.

The most rational strategy for investing in a market like India, then, is to drip-feed your money into it and to take advantage of what’s called pound-cost averaging. Essentially, it’s like splitting up your money to buy shares over time, instead of all at once. So you buy more shares when prices are lower and fewer when they’re higher. Over time, you pay an average price, rather than investing all of your money just before a crash.

Diversify across different countries

The other crucial lesson is not to invest too much in any one country. There are investment opportunities all over the world. A globally diversified approach delivers more reliable outcomes over time with less volatility than investing heavily in specific countries. It can help investors to stay on track, through all kinds of markets, towards their long-term goals.

The best way to invest in Indian equities is via a global equity index tracker or an emerging markets equity tracker. This gives you as much exposure to India as you need. But it also reduces the risk of your being too heavily concentrated, and allows you to share in the success of several different countries, not just one.

Finally, be patient, and keep your focus on the long term. Even economic superpowers go through tough times. The US, for example, has suffered numerous recessions and market crashes over the last century. Yet disciplined investors who remained invested were richly rewarded, thanks to what Warren Buffett has called the American Tailwind.

Today, there’s a strong tailwind blowing behind India. It won’t all be plain sailing, but this particular growth story probably has a very long way to run.