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Investing in Indian Stocks: Active versus Passive Modes

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Performance of passive funds

The WisdomTree India Earnings ETF (EPI) is the most heavily traded ETF that invests in Indian stocks. However, it is not the largest in terms of asset size. The fund manages $1.5 billion in assets and is invested in 241 stocks. Its total returns for 1Q16 stood at -3% while that for March stood at 15.6%.

Financials, information technology, and energy are the top three sectors invested in that order and form 18%–23% of the portfolio each. The fund tracks the WisdomTree India Earnings Index.

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Among these sectors, materials posted the highest total return in 1Q16, with Hindustan Zinc, JSW Steel, and NMDC Limited gaining the most in the period. Information technology stocks like Persistent Systems and Infosys (INFY) also had a good quarter. The healthcare (RDY), financials (IBN), and consumer discretionary (TTM) sectors fell in the period.

The PowerShares India Portfolio ETF (PIN) tracks the Indus India Index, is invested in 50 holdings, and manages assets worth $380 million. Over 20% of its assets are invested in the information technology and energy sectors each. It posted -2.7% total returns in 1Q16 and 12.3% in March.

The iShares MSCI India ETF (INDA) tracks the MSCI India Total Return Index, is invested in 74 holdings, and manages assets worth $3.5 billion, making it the largest passive fund investing in Indian stocks. Information technology forms 22% of the portfolio while financials are second with 16% exposure. The fund’s total returns for 1Q16 stood at -2.7%.

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Performance of active funds

The Matthews India Fund – Investor Class (MINDX) is the largest actively managed fund investing in Indian stocks. The fund was managing assets worth $1.3 billion at the end of February 2016, spread across 48 holdings. Stocks from the financial sector formed 27% of the fund’s assets and consumer staples and information technology, in that order, were second and third, forming a combined 35% of the portfolio.

The total returns of the MINDX stood at -4% for 1Q16. Its picks from materials and industrials sectors were the only ones that gained in the period. Meanwhile, financials and healthcare had a rough time.

The Eaton Vance Greater India Fund – Class A (ETGIX), which manages $197 million in assets and is invested in just 33 holdings, was down by 2.8% in 1Q16. Meanwhile, the Franklin India Growth Fund – Class A (FINGX) declined by 2.2% in the period.

Observation

Two of the three active mutual funds have done more poorly than most of the passive funds in the review. If you’re wary of India’s prospects and have a short-term horizon, it’s better to take the passive fund route.

On the other hand, if you’re positive about India among all other emerging markets, then actively managed funds may be better placed to meet your needs. Study the management style of a fund manager, look at the fees being charged, and then choose your mutual fund. Do not look at just returns, as they’re not even half the story.

The last geography in our review is the region’s giant: China.

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