Beneath India's Choppy Stock Markets, Index Funds Gain in Strength

Editor's note: India-focused funds that are available in the U.S. include the India Fund (IFN Quote) and the Morgan Stanley India Investment Fund (IIF Quote). Other India-based investments discussed in the supplemental videos in this column from TheStreet.com TV include the iPath MSCI India Index ETN (IFN Quote) and HDFC Bank (HDB Quote).

The Indian stock markets seesawed last week [Jan. 21-25] between fears of a U.S. recession, the Fed's three-quarter percentage point rate cut, President Bush's $150 billion economic stimulus package and a strong show by domestic investors as foreign funds recoiled. The benchmark Bombay Sensitive Index started the week with its second-worst ever intra-day fall of about 7%, but recovered some of that lost ground after Indian finance minister P. Chidambaram issued statements asserting India's growth fundamentals .

The mayhem, however, threw the spotlight on what has been a striking undercurrent: Passive index funds are gaining popularity as Indian mutual funds , including active funds , grew by 80% to $140 billion (Rs. 556,730 crore) between October 2006 and October 2007. India Knowledge@Wharton spoke with fund managers and faculty from Wharton and the Indian School of Business about the Indian mutual fund industry's recent growth, and whether active or passive investment vehicles will come out ahead.

A New Way to Play India

Six years ago, when Rajan Mehta left his plush job as vice president at Merrill Lynch in London to co-promote Benchmark Asset Management Co., India's first asset management firm focused on index funds, he had a tough time convincing distributors and investors of the opportunity in passively managed schemes. He says he felt a vindication of sorts last October, when the Indian edition of Readers Digest recommended index funds.

"Today, our Banking Index Benchmark Exchange Traded Scheme is the single largest equity -dedicated scheme being managed by any asset management company in the India," says Sanjiv Shah, executive director and Mehta's co-promoter at Benchmark.