Capitalising on India (Part I)

India's growth story is only mid to early cycle. Playing it the right way will make a significant impact to portfolios.
Mugunthan Siva

India Avenue

The Best Way to Invest in India

India, as the fourth-largest financial market and one of the world's fastest-growing economies, presents an undeniably compelling opportunity for investors. To fully capitalise on this growth story, it is essential to strategically invest in Indian stocks to maximise returns. 

We propose that three critical factors can guide investors in achieving this objective effectively. In this note, we discuss the first of the key factors.

Stay Invested: Structural Over Tactical

To evaluate the performance of staying invested versus tactical trading in the Indian stock market, we analysed the contrasting approaches of the two primary investor groups: foreign and domestic investors.

Foreign investors, including Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs), have historically favoured a tactical approach over a structural one in India. This strategy has often led to missed opportunities in this high-growth market, as their activities primarily revolve around short-term tactical beta plays rather than long-term commitments to structural allocations. Typically, EM and Asia Funds (a large component of FII//FPI investors) tend to play India more tactically, switching between over and underweight.

In contrast, Domestic Institutional Investors (DIIs) in India have evolved into "rupee cost averaging" through monthly investment plans via their local mutual fund. In CY2024 alone, local investors invested over US$60bn, into their own market!

By studying the timing and impact of FII entries and exits and comparing their strategies with those of DIIs, we aim to highlight key differences. Using historical data on allocations and the performance of the Nifty 50 index, we assess how effectively FII strategies leverage—or stray from—market opportunities.

Nifty Performance vs FII and DII Net Allocation

Source: NDSL, NSE, Motilal Oswal
Source: NDSL, NSE, Motilal Oswal

Period Net Flows and Subsequent Performance

Period FII Allocation
       A$bn
DII Allocation
       A$bn
Subsequent 12m
    Performance
1. Feb20 - Apr20
      -15.5        13.3           69%
2. Feb22 - Jun22       -25.6       22.5           16%
3. Dec22 - Apr23       -9.4       15.4           34%
4. Aug23 - Dec23       -9.9       11.6        11% (YTD)

Source: Motilal Oswal (Bulls & Bears), NSE, data as of 31/10/2024

FII's often reduce their exposure during market downturns, frequently missing out on the recovery gains that follow. In contrast, DIIs tend to increase their allocations during these periods, providing market stability. Historical data highlights that during significant market declines, DII inflows typically counterbalance FII outflows, with the Nifty 50 index often rebounding thereafter. However, FIIs commonly re-enter at higher market levels, reflecting suboptimal timing and forfeiting substantial gains from post-recovery rallies.

This pattern underscores the advantages of adopting a structural, long-term allocation strategy over a tactical rebalancing approach. A consistent investment strategy, akin to that of domestic investors, allows for better alignment with India's enduring growth trajectory and the potential for enhanced alpha generation. The compounding benefits of long-term investments play out across market cycles, rewarding those who stay invested. However, behavioural challenges often deter foreign investors from re-entering markets at higher levels after selling, further emphasising the need for a more disciplined, cycle-agnostic approach.

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This document (‘Document’) has been produced by India Avenue Investment Management Limited (‘IAIM’) ABN 38 604 095 954, AFSL 478233 and has been prepared for informational and discussion purposes only. This does not constitute an offer to sell or a solicitation of an offer to purchase any security or financial product or service. Any such offer or solicitation shall be made only pursuant to a Product Disclosure Statement, Information Memorandum or other offer document (collectively ‘Offer Document’) relating to an IAIM financial product or service. A copy of the relevant Offer Document relating to an IAIM product or service may be obtained by writing to us on info@indiaavenueinvest.com or by visiting www.indiaavenueinvest.com. This Document does not constitute a part of any Offer Document issued by IAIM. The information contained in this Document may not be reproduced, used or disclosed, in whole or in part, without the prior written consent of IAIM. Past performance is not necessarily indicative of future results and no person guarantees the performance of any IAIM financial product or service or the amount or timing of any return from it. There can be no assurance that an IAIM financial product or service will achieve any targeted returns, that asset allocations will be met or that an IAIM financial product or service will be able to implement its investment strategy and investment approach or achieve its investment objective.  Statements contained in this Document that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of IAIM. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Additionally, this Document may contain “forward-looking statements”. Actual events or results or the actual performance of an IAIM financial product or service may differ materially from those reflected or contemplated in such forward-looking statements. Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners. Nothing contained herein should be construed as granting by implication, or otherwise, any license or right to use any trademark displayed without the written permission of the owner. Certain economic, market or company information contained herein has been obtained from published sources prepared by third parties. While such sources are believed to be reliable, neither IAIM or any of its respective officers or employees assumes any responsibility for the accuracy or completeness of such information. None of IAIM or any of its respective officers or employees has made any representation or warranty, express or implied, with respect to the correctness, accuracy, reasonableness or completeness of any of the information contained in this and they expressly disclaim any responsibility or liability therefore. No person, including IAIM has any responsibility to update any of the information provided in this Document. Neither this Document nor the provision of any Offer Document issued by IAIM is, and must not be regarded as, advice or a recommendation or opinion in relation to an IAIM financial product or service, or that an investment in an IAIM financial product or service is suitable for you or any other person. Neither this Document nor any Offer Document issued by IAIM takes into account your investment objectives, financial situation and particular needs. In addition to carefully reading the relevant Offer Document issued by IAIM you should, before deciding whether to invest in an IAIM financial product or service, consider the appropriateness of investing or continuing to invest, having regard to your own objectives, financial situation or needs. IAIM strongly recommends that you obtain independent financial, legal and taxation advice before deciding whether to invest in an IAIM financial product or service.

Mugunthan Siva
Managing Director
India Avenue

Mugunthan Siva is Managing Director of India Avenue, an Australian based boutique investment management company, domiciled in Sydney, with a presence and advisory network in India. He has over 30 years experience in Australia and is lead...

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