Should you invest in India?
This means it would have more workers than the United States, the euro area and Indonesia combined, according to Christine Lagarde, managing director of the International Monetary Fund, who insists the potential benefits are enormous.
"The conditions are ripe for India to reap the demographic dividend and become a key engine for global growth," she said at a recent conference. "It is on the verge of a new chapter, filled with immense promise."
But investing in India is also a high-risk and volatile prospect where investors can make significant gains or suffer major losses over quite short time periods, points out Patrick Connolly, a certified financial planner at Chase de Vere.
Although India has made significant progress in terms of economic reforms, he argues there is still much to do and major issues to be addressed, including transport and energy improvements, not to mention the ongoing political risks.
"There is a real danger that some investors will be drawn to India based on the strong past performance figures, without having a real understanding of the underlying risks involved," he says. "Only investors willing to take high risks should be drawn to India."
It’s certainly a conundrum for investors. On the positive side, you have favourable demographics, plenty of world-class companies and entrepreneurs, a stockmarket that has risen considerably of late, and a growing middle class with rising incomes.
On the flip side, however, political issues and corruption have hampered progress in the country and there’s no doubt that its infrastructure is in need of upgrading, points out Mark Dampier, head of research at Hargreaves Lansdown.
"Progress has been slow but this highlights the higher-risk nature of investing in emerging markets,"
he says. "We continue to believe India has significant long-term growth potential but a long-term horizon is essential."
The most successful fund managers in the region, such as Hugh Young of Aberdeen India Opportunities, preach diversification and a focus on scrutinising individual companies in order to weed out all but those with the most potential.
"We manage a concentrated portfolio of around 30 stocks, all of which we know intimately, with diversification achieved through investment across multiple sectors," he explains. "Stock selection is what sets us apart and has been the key driver of our performance."
Looking ahead, Gary Potter, co-head of the multi-manager team at F&C Investments, believes the pro- growth and pro-reform government of Prime Minister Narendra Modi will ensure that long-term economic growth potential of India is likely to be realised.
Highlighting the significant achievements that Modi had to his name while chief minister of the state of Gujarat, Potter argues there are plenty of reasons for optimism for the country over the next few years.
"A reformist government and an accommodative central bank is a powerful combination," he says. "India has the most potential of all the global emerging markets to be one of the best destinations for long- term capital."
Shekhar Sambhshivan, manager of the Invesco India Equity fund, is also very positive about the changes that have already taken place in India and hopes these reforms will have a positive impact on the economic outlook.
"India is opening up and there are evolving business models, an expanding business landscape and a changing policy framework," he says. "The key is understanding these (areas), knowing the management teams well, and how they behave in the cycles."
Ben Willis, head of research at Whitechurch Securities, is in favour of India as an equity market but points out that investors need to acknowledge the fact that some consumer-facing companies have already re-rated. "I do not expect the stellar returns of last year and would urge a note of caution, as some areas of the market are looking fully valued," he says.
It’s a point echoed by Connolly. While agreeing that India is a good long-term bet, he insists that only those with relatively high appetites for risk should consider investing in a fund that is focused on the country.
"India undoubtedly has the potential for further economic and stockmarket growth but there are very high risks involved and so for most people the best approach will be to get exposure through broad-based emerging market funds," he says.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.