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Star of India

Emerging markets continue to attract large amounts of investors’ money and single-country funds are grabbing a lot of attention. Brokers should remember, however, that these are inherently more volatile than funds with a wider remit. One of the countries grabbing most of the headlines is India.

India is the world’s second-biggest country in terms of population behind only China and seventhbiggest in terms of land mass. It has 36 cities with a population of more than one million and is forecast to be the most populous country in the world by 2050.

It is also becoming increasingly wealthy and has the biggest English-speaking population in the world with a huge educated middle class.

It is clearly a massive investment opportunity so you might wonder why there are hardly any Indian funds available. The balance is gradually being addressed and one of the new launches is the New Star Indian equity fund.

New Star has taken a slightly unusual route by effectively sub-contracting the management of the fund to Tata Asset Management.

Tata is a huge Indian conglomerate and many of you will be familiar with it from its purchases of Corus and more recently Jaguar and Land Rover.

It has operations in 54 countries and accounts for 3 per cent of the entire Indian economy and 5 per cent of its exports. It is the biggest private employer in India.

Its investment division, Tata Asset Management, is one of the fastest-growing investment houses in India and runs around $7bn for more than two million investors. It already manages a number of funds with impressive track records for Indian nationals.

It believes it has an investment edge through the sheer depth of research it does within the Indian market. It looks to exploit opportunities created by a fast-growing economy without losing sight of stock valuations. This discipline is important because it is easy to get carried away in such situations, drastically overpay and suffer a big disappointment.

Tata’s investment team of 18 sift through around 4,000 stocks on the Indian market and bring this list down to a manageable universe of about 400 companies. From this, a focused portfolio of 35-40 shares will be selected. It tends to invest in bigger companies (those valued above $1bn) and the New Star fund will be around 75 per cent invested in this area.

When I visited Tata’s offices in Bombay, I was struck by the standards of professionalism and ethics which would put most Western companies to shame. Risk management is high on the agenda but this will not be a closet indexer of the Indian stockmarket as Tata will take calculated risks in an effort to outperform the market.

Without doubt, India has huge potential. It has superb demographic profile with a large part of the population being young people, which in the long term means it could be even more successful than China.

However, there are problems and infrastructure and power are two very obvious ones.

For such a big country, India should be self-sufficient in food but poor infrastructure means that 25 per cent of foodstuffs rot before they get to their final destination. A massive roadbuilding programme is under way, with 7,300km under construction.

Power generation capacity needs to be increased as India produces 9 per cent less electricity than current demand and 78 million homes do not have electricity.

Inflation is also rearing its ugly head in India. Fortunately, the Reserve Bank of India has been far more proactive than most emerging market banks and has raised interest rates but inflation could still present a significant risk in future.

It is vital that investors remember that India is neither a one-way bet nor a short term one. Volatility should be expected and at times will be extreme but true long-term investors with cash to spare should probably view sharp falls as an opportunity to top up their investment.

India also makes a good area for regular savings as, during periods when the market is low, you can gradually pick up units at a lower price.

In my opinion New Star has scored an impressive coup by getting Tata to manage this fund. Not many people have much experience of investing in the Indian stockmarket but Tata is certainly the kind of group you would back to succeed.

It is imperative that an Indian investment should be held with at least a 10-year time horizon so short-term traders should beware.

The New Star Indian equity fund is currently in an offer period. You can buy it for a fixed price of 500p per unit until June 27.

Mark Dampier is head of research at Hargreaves Lansdown

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