Many investors are betting on India’s growth story by investing in stocks of Indian companies. However, it requires careful research and analysis. In this article, we will explore why betting on India’s growth story, rather than on stocks, maybe a smarter investment strategy.
How is India growth story positioned?
India’s growth story is compelling and evolving at a rapid pace thanks to Government’s increased focus on infrastructural development and government reforms such as PLI (Production-Linked Incentive), taxation reforms, etc. The country has emerged as one of the fastest-growing major economies in the world and is also the world’s second-largest producer of agricultural products. It has a demographic advantage due to its large and growing population, with a median age of just 28 years. This young demographic creates a large workforce, consumer and retail investor base, which is expected to drive economic growth in the years ahead.
Key Highlights of Resilience in Indian Economy:
- Domestic demand is likely to be the key driver of India’s growth trajectory.
- Real estate has been a major catalyst of the economy and contributes nearly 50% of India’s GDP and is anticipated to exceed the $1 trillion mark by 2030.
- The Union Budget 2023-24 anticipates exports to grow at 12.5% in 2023.
- GST collections recorded an all-time high of 1.87 lakh crore in April.
- Corporate and Bank balance sheets continue to remain robust.
- India’s PMI (Purchasing Managers Index) soared to a 13-year high of 62 points.
- Balance sheet strength, supply side reforms and improving sentiment has supported investments.
- The country’s GDP has been growing at an average rate of around 6-6.5% per year and is expected to continue over the long run.
As you see in the chart below, India’s GDP growth rate has been resilient vs major economies.
India’s GDP as compared to global economies.
Source: Bloomberg, IIFL Research.
Note: For India, GDP growth estimates are for FY24
How can investors participate in India’s growth story?
One way is to invest in Indian stocks. There are many high-quality Indian companies with strong fundamentals and growth potential. However, investing in individual stocks carries significant risks. Stock prices can face fluctuations, and even well-run companies can suffer from factors outside their control. Investors need to have a deep understanding of the companies they invest in and be prepared to hold their investments for the long term. If you were to look at the top stocks in the Nifty 50 Index for the period between 1996 to 2021 - out of the 50 stocks, only 13 stocks continue to be part of the index’s journey 25 years ahead since inception. This shows the dynamic nature of the index and the fact that you cannot rely on few stocks to build your long term portfolio. Also, the portfolio composition has changed in terms of sectoral weights.
Source: NSE data as of April 28, 2023. Past performance may or may not be sustained in the future.
A thoughtful way to participate in India’s growth story is to invest in mutual funds or ETFs (exchange-traded funds). These funds invest in a diversified portfolio of Indian stocks and offer exposure to India’s growth story by spreading these risks across diverse stocks comprising of various sectors and market cap. Over 25 years and counting, the Nifty 50 Index has clocked in a return of 11.10% as of April 28, 2023. Thus, an ETF or mutual fund tracking the index is better positioned to provide returns in line with the Nifty 50 Index.
Here are some of the reasons how investing in mutual funds compares to investing directly in stocks:
Investing in India’s economic potential through a diversified bouquet of mutual funds and ETFs can be a good opportunity if you are looking to diversify your portfolio and benefit from the country’s long-term growth potential. However, you should consider your risk appetite and investment goals before investing in mutual funds and ETFs.
Remember that you can never be sure of what will work and what will not in the future. Direct investment in stocks is a time-consuming process to build a portfolio of stocks. In short, you are directly responsible for the stocks you choose. Direct investment may require you to be a speculative investor and monitor the markets constantly.
On the other hand, mutual funds offer diversification, lower costs, convenience, and access to professional management, making them a good option for both beginner and experienced investors. It is possible to do your sip with Rs. 500 a month. Starting with index mutual funds or ETFs is also another way of participating in the India growth story as the fund passively replicates the benchmark index by investing in stocks in the same composition as the index.
Therefore, there is no right or wrong answer between investing directly in stocks or mutual funds. Investors can choose one based on their level of expertise and risk appetite.
Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.
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