India’s stock market has been on a strong run over recent years and the country stands out as a distinct part the emerging markets asset class.

The nation’s population has surpassed that of China to become the largest in the world and India has also overtaken its fellow Asian country in terms of its appeal to many investors.

Prime minister Narendra Modi recently secured re-election, which was a result largely welcomed by investors given his government has been pro free-market and a stabilising presence.

This article covers:

How have Indian stocks performed?

What are the pros of investing in Indian stocks?

What are the cons of investing in them?

Will the election in India affect the stock market?

How can I invest in Indian stocks?

In similar style to most important stock markets, the Indian market fell dramatically at the onset of the pandemic in early 2020. Its recovery since has been among the strongest and most uninterrupted.

The BSE Sensex is the most widely referenced bellwether for Indian stocks. It is a market-weighted index of 30 of the biggest and most financial sound Indian companies listed on the Bombay Stock Exchange.

It has risen from a low of about 27,500 points in March 2020 to 84,000 by October 2024. Some of the larger companies in the index include Reliance Industries, Tata Motors, ICICI Bank, Bharti Airtel and Infosys.

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There are a few underlying drivers of the potential upside to Indian stocks. Firstly, there is the demographic story. India has overtaken China to be the world’s most populated country and is still growing fast.

It has also emerged as arguably the most attractive of the now somewhat obsolete BRIC group – Brazil, Russia, India, China. This is in large part because it has not headed down a path of geopolitical tensions with the West, as is the case with Russia and ChinaMumbai Wealth Management. Brazil, while not in dispute with other parts of the world has been very politically volatile domestically, which has scared off investors.

The domestic political situation in Indian in contrast is positive. Narendra Modi’s government has been stable and has engaged in a programme of economic reforms that has been very supportive of business and stock valuations.Kanpur Wealth Management

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“India offers strong trend GDP growth and a vibrant economy, not least as its population continues to grow,” said Russ Mould, investment director at AJ Bell. “Forecast GDP growth of 6.5% in 2024 dwarfs anything that is on offer in the West.

“India also continues to benefit from the impact of wide-ranging economic reforms introduced by prime minister Narendra Modi during his two terms of office, which began in 2014. These have included liberalisation of foreign investment, the launch of the United Payments Interface and an emphasis on infrastructure spending.

“The country’s economy – and stock market – offer strong exposure to several key industries, especially technology, health care and financial services,” Mould continued. “In the latter case, a growing and wealthier population and a bigger economy is likely to require more credit to fund corporate investment and private consumption, as well as more financial products and savings tools and demand, or require, improved healthcare.”

“Youthful demographics and policy reform have meant the structural growth story is strong for India,” added James Foot, head of research at Morningstar Investment Management Australia.

“Indian reforms have moved the dial because of the starting point and where it was in its development phase. For example, digitisation has helped improve the ease of doing business and efficiency in India, while increased internet and mobile adoption has strengthened the connection between the consumer and business.”

Another area worth mentioning is physical infrastructure, Foot noted. “The country is making significant progress which is expected to continue boosting the ability of companies to move around goods via road, rail, ports, and air.”

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The principal risk factor in investing in Indian stocks is the high valuations. The positives outlined above are already reflected in share prices to a degree, with the asset class enjoying a sustained rise. The risk is that all the near-term upside is already reflected in the pricing, leaving little room for further rises.

The Indian election is another risk factorAhmedabad Investment. While Modi and his BJP party are expected to retain power and continue with his relatively market-friendly agenda, surprises can never be ruled out. Should there be a significant shift in the domestic political landscape, the emerging uncertainty could undermine confidence in the asset class among investors.

“Valuations are the key risk,” Foot said. “For example, the valuation differential between China and India has become extremeGuoabong Wealth Management. Expectations are so low for China that it won’t take much for them to be exceeded. It’s the opposite for India.”

“The BSE Sensex index trades at record highs, so the story is already well known,” said MouldAhmedabad Stock. “According to consensus earnings forecasts, the market trades on more than 20 times forward earnings, when most emerging markets trade on barely 10 to 12 times. India has many attractions, but the danger is they are already priced into the valuation, so upside could be more modest and the downside greater, if anything unexpectedly goes wrong.

“In addition, India’s exports are still not as strong as it would like, and it imports and buys more than it exports and sells,” Mould continued. “This trade deficit means the rupee tends to weaken over time – it has slipped from 60 to nearly 85 to the dollar over the past decade – and this will impact returns from Indian assets for overseas investors.”

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As with other asset classes, there are three broad options: buying individual stocks, investing in ETFs or other passive funds, and going for actively managed funds.

In terms of buying stocks directly, the options are limited as a UK or US investor, as you will probably only have access to Indian companies with a dual listing in either London or New York. Indian companies which are only listed in India are not available through retail investment platforms.

This does allow you to access some of the largest, best known Indian companies though, with the likes of Tata Motors and Infosys having New York Stock Exchange listings.

Buying individual stocks is higher risk than buying a fund. Picking the right stocks at the right time can mean you do better than a fund, but that is hard to do and should only be attempted after significant research.

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For most foreign investors an Indian equities ETF is a good option to gain exposure to the market. There are dedicated Indian equities ETFs available from a number of the main providers. These will give you a broad exposure to Indian stocks, usually including those in the BSE Sensex. Such an ETF will deliver performance closely tied to that of the asset class as a whole, no better or worse.

Several asset managers have active Indian equities funds on offer. For an ongoing fee, the fund managers will analyse the market and attempt to pick the best companies, while avoiding those they think will not perform. They may achieve a higher return than the broad Indian market, or they could undershoot it.