NEW YORK — To find the year’s best-performing mutual funds, head east.
In India, excitement surrounding a new prime minister has catapulted stocks higher, and mutual funds that focus on the country have reaped the gains. The Matthews India fund has returned 52 percent in 2014 through Wednesday, for example. That’s more than any other fund that Morningstar tracks, and it’s more than five times the gain of the Standard & Poor’s 500 index. Only seven mutual funds have returned more than 30 percent this year, and five of them focus exclusively on Indian stocks.
Nearly all of those big returns have come since the May elections that swept Prime Minister Narendra Modi into power. Hopes are high that the government can push through reforms to invigorate the economy of the world’s second-most populous country. India has struggled with high inflation and a slow-moving bureaucracy that has hurt growth, analysts say.
Most investors are content to keep just a small slice of their portfolios in Indian stocks. Usually, that means owning a general emerging-market stock fund that also includes China, Brazil and other developing economies. Investors have plugged a net $2 billion into Indian stock funds this year. The category has just $7 billion in total assets versus $438 billion for general emerging-market funds.
Those investors should keep in mind that Indian stocks have historically seen sharper swings than U.S. stocks, says Sunil Asnani, lead portfolio manager of the Matthews India fund. He’s optimistic that Indian stocks can keep rising in the long term, but anyone looking to make money in the next year may be disappointed. Here are excerpts from a recent conversation.
Q: How much of this year’s gains for Indian stocks are due solely to Modi’s election?
A: If you look at the fundamentals of companies that were doing fine before the elections, they haven’t gotten dramatically better. And the fundamentals of companies that were not doing well before he came into office haven’t become better either. This rally has been driven primarily by the Modi wave.
Q: Are you worried then that the market’s expectations are too high?
A: In India’s case, they are never realistic. Maybe they are expecting too much, especially on companies where their valuation is hinged on reforms taking place. There, they will see a lot of disappointment.
Q: So is it foolish to get into an Indian stock fund now? Wouldn’t that just be buying high?
A: If you look at the valuations of stocks, they are slightly above their historical five- and seven-year averages. So if you’re making a shorter-term investment, they can go in either direction.
