Mutual Funds and ETFs that Invest in India for US NRIs

For NRIs living in the US, investing directly in India using a Trading/DEMAT/PIS account is riddled with hassles and complicated tax returns. Similarly, investing directly in Mutual Funds that operate in India is also a non-starter because of complications arising out of PFIC tax issues. For these two reasons, my goal is to NOT pursue any of the direct investing in India. So, this leaves us with funds offered by US companies that invest most of their capital in India. There are a quite a good number of choices available these days.

WisdomTree India Earnings Fund (EPI)

EPI happens to be the first ETF investing with 100% exposure to India. With this fund, you have access and broad exposure to local shares of approximately 150 profitable companies. This fund tracks to the WisdomTree’s own India Earnings Index. The expense ratio is 0.83%. This ETF is recommended more often in articles than its peers. My guess is that it is passively managed and offers more diversification with exposure to 150 companies than its peers. In my own portfolio, this fund takes less than 1%. For me personally, this fund is down by 19% since I bought it in 2009. One of the problems I have with ETFs is that investing in them is not automatic (unlike mutual funds) where I can dollar cost average like my other index funds. This is one reason why I have not looked into purchasing additional shares because they subconsciously trick me into active trading. Given Indian market's lackluster performance in 2011, I don't quite believe I need to keep plowing money into EPI or any of the funds below.

Update 6/15/2012: I have held this investment for 3 years now. I bought shares at a prices of $22 in 2009. After volatile markets, this fund reached $25 once once and quickly came below my purchase price. Currently, this fund is trading at $16.50 in June 2012. Given that this fund has not performed well over a 3-year period, I don't see a reason to hold on to this fund. Plus, Indian economy is losing steam. For this reason, I plan on selling this fund, even at a loss. I still believe investing in Emerging Market Index Fund (that has an exposure of 7% to Indian markets) is still the best way to go. I bought EPI on an experimental basis and I will end that experience very soon. No point in holding on to a laggard that is risky. I will stick to my diversified portfolio of index mutual funds.

Matthews India Fund (MINDX)

MINDX is an actively managed mutual fund that normally invests at least 80% of total net assets in India. It invests in approximately 43 companies. As such, its exposure is not broad. The expense ratio is 1.13%. This mutual fund has performed better than all other India funds. This may be because it is actively managed. I find this fund recommended by people on various forums as its performance has been very consistent. While I like the consistent performance of this fund over 3 and 5 year period, I don't like the fact that it only holds stocks of 43 companies. I also do not like the fact that this fund is not offered as a NTF (non transaction fund) via Vanguard. If it was NTF, I would have probably gone for this fund for dollar cost average advantage.

iShares S&P India Nifty 50 Index Fund ETF (INDY)

INDY is the most recent addition in the Indian large cap ETF space. The fund seeks to track the performance of the S&P CNX Nifty Index which consists of 50 of the largest Indian companies. The expense ratio is 0.79%. I like Index funds a lot due because there is no manager risk involved in such funds. Also, index funds typically have less churn and volatility than their actively managed counterparts.

PowerShares India Portfolio ETF (PIN)

PIN is based on the Indus India Index. The Fund normally invests at least 90% of its total assets in securities that comprise the Index and ADRs based on the securities in the Index. The Index is designed to replicate the Indian equity markets as a whole, through a group of 50 Indian stocks selected from a universe of the largest companies listed on two major Indian exchanges (NSE & Sensex). The expense ratio is 0.79%.

Other Fund Options

SCIN: EGShares India Small Cap (poor performance)
INCO: The EGShares India Consumer ETF (launched in 2012)
INDAX: ALPS/Kotak India Growth Fund (high front load, high expense ratio, launched in 2011)

Other Thoughts

The trend I am seeing with India funds is that they are still not as broad as some of the total stock market funds you would typically find in the US. If you look at Vanguard Total Stock Market Index fund, it invests in ~3300 companies across the entire US market. This type of diversification is un-unprecedented and your investments are truly passive. I'm not finding that in any of the India funds.

Secondly, there are more emerging markets than you imagine. As markets mature, more emerging markets will spring up. So, instead of restricting your investments to one country, why not instead invest directly in the Emerging Markets fund that changes in country allocations over time depending on the market conditions. Vanguard Emerging Markets Fund currently invests in over 900 companies across all emerging markets.

Lastly, any investment decision should be purely a mathematical decision, and not an emotional one. Granted that we have a soft corner about our motherland, but should that be extended to long-term investment decisions? I think not.