Inside India - Part III

Add comment February 15th, 2008

  Jody J. Jungerberg, MBA, CFS, ChFC, CFP® 

My client has great comfort in his decision to invest in India’s growth because he sees it first hand.  As advisors, we have also allocated a portion of our client’s assets to emerging markets, and more specifically, to India.  It does not go without its challenges however.

Participating in the market should be done via mutual funds or exchange traded funds.  It is difficult to purchase individual securities.  There are index funds available (which we prefer) as well as exchange traded structured notes. (A little complex but think of a bond fund which will provide its return to investor based upon a basket of Indian stocks instead of direct ownership).  

Until recently, we utilized such a structured fund offered through Barclay’s, the iPath India Index.  However, late in October, the fund – while an index oriented vehicle – began trading at a premium of 14% of its fair market value.  Certainly we started watching this.  Why pay more for an investment than it is actually worth?  This occurred because Indian regulators limited the broker/dealer community’s ability to issue structured notes based on the India stock market.  The regulation was enacted to prevent market speculation from causing a market bubble.  At this point in time we do not know if and when this decision might be reversed.  This decision effectively placed a cap on Barclay’s ability to create new iPath notes.  As such, existing shares began acting somewhat like a closed end fund when demand overwhelms supply. 

We are now looking at new and upcoming vehicles for our exposure in India.  There is no question that there is growth potential in India and many other emerging markets.  The challenges for investors (and for us) are finding ways to participate within the guidelines we believe prudent:  low cost, no load, no imbedded premium.  Stay tuned.