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There's an Investing Opportunity in India

Simon Constable

While Americans were going to the polls in November something big happened in India. It has presented an unexpected buying opportunity for nimble investors who don't mind taking on some additional risk.

Without warning on Nov. 8, India's Prime Minister Narendra Modi announced that the existing large denomination rupee bills would be scrapped. The idea was to help eradicate the endemic corruption that plagues the country.

Anyone holding such currency would need to swap the notes for new ones, and if they were exchanging more than a small amount of cash the owners of the currency would pay a tax to the government.

"That move took everyone by surprise, both domestic and foreign," says Win Thin, global head of emerging market currency strategy at Brown Brothers Harriman in New York. "It caused all sorts of problems."

[See: The 10 Best Dividend Stocks of 2016.]

Specifically, the lack of cash, in what is an overwhelmingly cash-based society, squeezed the economy, bringing much of it to a halt. India had seen growth at a fair clip earlier in the year.

The Nikkei India Manufacturing Purchasing Managers index, which measures the health of the factory sector, dropped from 52.3 in November to 49.6 in December. Readings of less than 50 indicate contraction in the sector.

That, of course, sent stocks in the country down. The iShares MSCI India exchange-traded fund (ticker: INDA), which tracks a basket of Indian stocks, is down 5 percent since the currency announcement. That compares with a 6.4 percent rally in the Standard & Poor's 500 index. The decline in India's stock market has stabilized over the past few weeks.

Why buy now? This pullback should come as no surprise to investors. Still, the drop in prices now presents an opportunity for investors to jump into the sector. They might want to consider doing so because India's cash crunch is likely to be a transitory problem.

"For India, we still have a positive view for the medium-to-long term," says Stephen Wood, chief market strategist at Russell Investments in New York.

[See: 9 ETFs to Buy When the Market Tanks.]

If you don't mind holding on to your investments for a few years rather than a few weeks, then using the drop in stock prices as an opportunity to buy stocks at better prices might make sense.

Wood warns that as with any investment in emerging markets there will be volatility. But with that additional risk should come the potential for better returns.

"India's economic cycle is enviable within the emerging market space," Wood says. "There are a lot of reforms that will be maintained."

Indian reforms include those aimed at liberalizing its economy by deregulating energy pricing, eliminating minimum pricing on agricultural goods and allowing greater foreign investment in key domestic industries. Such changes should help the economy attain a high rate of economic growth in the future, and provide a good backdrop for stock investors.

It's also worth noting that prior to the ill-fated cash crunch India boasted stellar economic growth that was faster than China, which itself had been a standout of fast growth in the emerging world for years.

Not everyone's so optimistic. Of course, there are still worries about whether reform and economic growth will result in higher stock returns.

"Not withstanding the political reforms and the efforts to clean up the black market, it seems like India is always positioned really well but continually disappoints in the equity markets," says Jack Ablin, chief investment officer at BMO Private Bank in Chicago.

Put more simply, there are risks that investing in the country won't work out as planned.

How to invest. You don't need to find a broker to buy individual securities in India. Instead, try looking at various types of specialty funds.

Two mutual funds that specialize in Indian stocks are Matthews India Investor ( MINDX) and the Wasatch Emerging India Investor ( WAINX). The Matthews fund has annual expenses of 1.11 percent, while the Wasatch fund costs 1.82 percent, or $111 and $182 annually, respectively, per $10,000 invested.

For those who prefer to invest in ETFs, try the PowerShares India ETF ( PIN) or the INDA ETF. These funds have annual expenses of 0.82 percent and 0.71 percent, respectively.

[See: 20 Awesome Dividend Stocks for Guaranteed Income.]

The benefits of the ETFs are clearly the lower annual expenses. Plus, there is the ability to sell an ETF during market hours whereas there isn't with mutual funds.

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