Adding India to your ISA now could help you save for decades

21st March 2017 by Darius McDermott

Mentioning demographics when one talks about India almost seems redundant – so obvious an advantage does that country have. Yet with a population of around 1.3 billion; a growing, youthful workforce; and a swelling middle class, it’s also impossible not to highlight the long-term potential. UK equity funds form the core of most people’s ISA investments, but an allocation to an India fund this season could help you to save for decades to come.

Of course, India has boasted this potent mix for years. Indeed, this is one of the reasons that Indian equities are consistently ‘expensive’ compared with other emerging markets. But it has arguably been missing a key ingredient—the yeast, if you like—to make it all rise. Over the past few years, prime minister Narendra Modi has been making some positive changes that may be beginning to bear fruit.

The new goods and services tax bill that will give India a unified national tax system was passed last August and is due to be implemented from 1 July. This is expected to increase the government’s tax revenue, while also simplifying compliance for businesses by cutting numerous state level codes. Other bills passed in 2016 include the Aadhaar Act, which expands the use of the biometric ID numbers now issued to all Indian citizens as a way of trying to improve welfare efficiency, as well as foreign direct investment reforms that open up a host of new sectors for foreign investment and ownership.

Modi’s party also had a few significant wins in state elections earlier this month, notably in Uttar Pradesh, which is India’s most populous state. These victories leave the party in a good position to gain more seats in the upper house of parliament, where it has hitherto lacked a majority. Because legislation must be passed in both the upper and the lower houses before it becomes law in India, this could be very good news for reform momentum.

Another factor that seems especially relevant following Trump’s election is that India is the least reliant on exports of any of the Asian economies; its economic growth is primarily domestic-driven. We certainly saw evidence of this last November when Modi surprised Indians by demonetising 500 and 1000 rupee notes in a bid to crack down on corruption and black market money. These notes made up 86% of all money in circulation and without this cash flowing through the economy, many businesses reported immediate sales declines. New notes are already being printed, however, and economic growth figures for the quarter ending December suggested the slow down was not as great as initially feared. Improved tax compliance could end up being a further benefit, as authorities gained a wealth of data on businesses’ and individuals’ income circumstances when people were forced to hand over their notes to banks or risk losing the money completely.

One other factor this November demonitisation does demonstrate, however, is that investing in India will typically be far more volatile than holding, say, UK equity funds. Following Modi’s announcement, Indian equities fell nearly 9% in sterling terms before bottoming-out on Boxing Day1. They’re now up by 9% from that same point in November2, but the dip highlights the fragility of investor sentiment.

There’s no doubt about it, India is a higher risk investment. You need to be comfortable with some yo-yoing in the value of your savings if you’re going to hold India funds, and you need to keep in mind that these sorts of investments are best held over the long term with the aim of realising the region’s higher growth potential.

Two funds whose experienced managers and track records of strong performance give me confidence in this space are Goldman Sachs India Equity Portfolio and Ashburton India Equity Opportunities. Managers on the Ashburton team have travelled regularly in India for around two decades and talk a lot about the kinds of changes they have witnessed first-hand in the country’s economy. This local insight makes them well-placed to find interesting growth opportunities that others may not uncover and their fund is a concentrated portfolio of no more than 30 of their best ideas. The Goldman Sachs team also have the local advantage, based on the ground in India and Singapore. Theirs is a bigger fund and has more holdings—between 80 and 90—across all sizes of companies, although with a focus on the smaller and medium-sized part of the market.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.

1 FE Analytics, MSCI India, TR in GBP, 08/11/2016–26/12/2016

2 FE Analytics, MSCI India, TR in GBP, 08/11/2016–17/03/2017