How to Invest in Mutual Funds in India

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Investing in India or any foreign market may feel like going a blind alley fraught with risk and uncertainties. But Mutual funds are the investment medium which can make the experience easier. By investing in Mutual funds instead of directly in individual stocks, investors can avail the opportunity to profit from India without in-depth knowledge of the Indian stock market. With a mutual fund from India, investors can pool their money with that of others and benefit from the market and investing expertise of a professional manager.

Advantages of Investing in Mutual Funds in India

India is one of the fastest growing emerging markets. Investors tend to think of China when it comes to investing in fast growing economies. However, India is fast catching up. India is one of the strongest growth-based global economies, and India could pass the United States by 2025. Most of Indian companies are not traded on US stock exchanges. But investors can gain access to Indian stocks through various mutual funds.

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India's Growth Potential

India is one of the so-called BRIC (Brazil, Russian, India, and China) nations. These countries represent four of the fastest-growing emerging market economies in the world. In 2003, Goldman Sachs reported that the BRIC nations will become wealthier than developed countries by 2050. Furthermore, India will become a dominant global supplier of manufactured goods and services. Investors can potentially profit from India's growth by utilizing one, or more, of the Indian mutual funds.

India Mutual Funds

India focussed Mutual funds that hold Indian securities give the investors access to one of the fastest growing economy. Funds that invest in Indian stocks are recently having a very good run with return approaching 20%. For example Morgan Stanley's India Investment Fund (IIF) invests largely in India's financial, oil and gas, and manufacturing sectors. This fund outperformed Standard & Poor's 500 index by 5 percent (7/26/10).

Foreign Direct Investment

Foreign direct investment is capital foreign investors are willing to invest, and risk, in a particular country. This influx of capital can help growing economies. Last year alone over $17.5 billion in foreign direct investment was made in India. It makes sense to include India within a portfolio as long as it continues to develop both fiscally and socially to sustain growth. India's growth can be contributed to a young, educated workforce. This young workforce gives India a demographic advantage over the long run over even China. China’s one child policy might come to haunt it one day.

Mutual Fund Types available in India

First step in understanding mutual fund investment in India is to first understand the types of mutual funds available.

Open-End Mutual Funds: Open-end mutual funds from India offer liquidity and the opportunity to purchase and sell shares at prices related to their net asset values (NAVs). They do not have a fixed maturity date.

Closed-End Mutual Funds: Closed-ended mutual fund options have fixed maturities. When these funds are initially introduced, you can invest in them directly. After the initial issue period, you can purchase them on the stock market.

Interval Options: Interval options combine the features of open and closed-end funds. Shares of these funds from India may be traded on the stock market or bought and sold at set intervals.

Decision Making

Understand that investing in Indian markets can offer you potential for capital growth and income. However, there are special risks involved when investing overseas.

Your portfolio may already have exposure to Indian stocks indirectly through other investment vehicles. Understand your overall exposure to decide your comfort level.

Determine what portion of your portfolio to contribute to mutual funds from India. Independent financial advisor can help you understand your risk tolerance and investment time horizon.

Mutual funds from India like any other economy may be affected by world events, as well as political and economic changes. This may be more of a case with developing economies.

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There is currency risk involved when you invest in mutual funds from India. Your overall return will be affected by currency fluctuations.

Find Mutual Fund Rating

Sort list the best mutual funds by their Mutual Fund Ratings. One source for mutual fund ratings is the Morningstar. Morningstar is the leading research and rating agency for mutual funds. They rate mutual funds on a scale of 0 to 5 stars with 5 being the best. While a mutual fund rating should not be the only factor to consider, it is important.

There are other rating agencies as well. Business Week and are other popular ones. Try not to focus on just one companies rating for a specific mutual fund. Some companies might be influenced by certain factors that sway their decision.