Get India into the portfolio... but how?

Recognition of India's Unique Characteristics

India is now the worlds 4th largest economy, surpassing Japan just recently, with only the US, China and Germany ahead of it. Investors are also recognising its unique demographics and lower correlation to other equity markets, which continue to increase its appeal as a portfolio piece in a global equity portfolio. After all India is over 4% of global market cap already....

Structuring an Efficient Investment Framework for India

Investing in India requires more than just market participation — it demands a well-structured, cost-efficient operational framework to mitigate transaction costs, tax inefficiencies, and market frictions. Given India's higher set-up and transaction costs, as well as its structural inefficiencies, implementation becomes critical to investment success. 

Designing an India-focused investment vehicle that minimises operational leakage is essential to maximising returns.

For example, India-focused ETFs are relatively expensive to implement. The world's largest India ETF, with over A$14 billion in AUM, charges approximately 62bps per annum, despite being a passive strategy. Other India-only ETF's which are passive or smart-beta in nature, available in Australia charge between 69-80bps per annum. This contrasts sharply with ASX 200 and S&P 500 ETFs, which typically charge between 1-5 bps for purely passive constructs.

The higher costs stem from the fact that India is an expensive market to set up operations, obtain licensing and has higher transaction costs and currency conversion costs. Apart from this there are also trading time zone mismatches and frequent rebalancing which contribute to slippage and affect overall returns.

Generating alpha in Indian equity markets is a critical requirement to offset the higher costs and capital gains tax. Ultimately, structuring an India-focused investment vehicle efficiently offers significant advantages in decreasing costs and maximising returns for investors.

Rebalancing in a high-transaction cost market

Investment structures relying on systematic trading or frequent rebalancing, such as passive or smart-beta ETFs, often incur higher transaction costs than actively managed funds. 

• Passive ETFs operate through model-driven rebalancing, which typically results in quarterly portfolio adjustments. 
• New in or out flows can dictate buying or selling "the model" to replicate indices. This is costly, given most portfolios have 25-150 stocks.
• Passive strategies may also generate more taxable events, whereas active strategies can be structured more optimally, by being mindful of existing tax positions.

Home-Ground Advantage: Reducing Costs with Local Infrastructure

By reducing turnover and leveraging local expertise, actively managed funds can lower transaction costs while improving tax management. 

A well-structured active India strategy—with a long-term investment approach, localised stock selection, and efficient portfolio construction — can significantly lower cost leakage and trading inefficiencies.

Using a local custodian for India, rather than a global custodian, who uses a sub-custodian can reduce cost. Global custodians typically charge $50-70 per trade in India, which can add up for investors transacting in India. This is not pointed out in an EM or Asia fund as transactions costs in other regions may be far cheaper than India i.e. Hong Kong. In contrast, employing a local custodian, based in India can reduce transaction costs to $15-20 per trade, reducing leakage in investment performance.

Beyond cost savings, local expertise is also crucial for corporate governance and risk management. In India, promoter ownership (where founders, families, or controlling entities hold significant stakes) averages 50% across all listed NSE stocks, significantly higher than in other regions. While this structure provides stability and strategic direction, it also raises concerns over governance risks, related-party transactions, and minority shareholder rights. Funds with local insights and governance oversight are better positioned to navigate these complexities.

Implementing an Active, India-Only Investment Strategy

For investors seeking exposure to India’s high-growth economy while minimising inefficiencies, an actively managed, India-only investment vehicle (like an Active ETF), can be an attractive solution. By integrating a local network and infrastructure, more cost-efficient custodianship, and region-specific market expertise, an active strategy can a better outcome in harnessing India's long-term growth potential. Given more investors are seeking long-term exposure, leakage can add up over the years!