'BRIC' ETF Investing: Getting Started in India - TheStreet

India is a country with mind-blowing economic potential in the coming years. As is, its economy is growing at a rate of over 9% per year (see data from India's Central Statistical Organisation).

Now, with two India-focused exchange-traded funds (

ETFs) in development, here is a primer on India and how you can get a share of the "I" action in BRIC.

BRIC Recap

BRIC is the term investors use to describe the emerging economies of Brazil, Russia, India and China (see

"'BRIC' ETF Investing: An Introduction"). The BRIC countries are the poster children of

emerging-market investing. Each country is estimated to become an economic powerhouse within the next several decades.

Whether or not you believe the hype surrounding BRIC, the returns are irrefutable. BRIC

securities have pounded returns well into the double digits this year with no signs of slowing down, including India-based companies such as

ICICI Bank

(IBN) - Get Report

and

Mahanagar Telephone Nigam

(MTE)

(see the "Portfolio Tracking" section of

Stockpickr's "Highest-Yielding BRIC Stocks" portfolio

).

So, Why India?

There are a couple of reasons why Indian investments could be an attractive addition to your portfolio. First, outsourcing has become the name of the game here in the U.S., and India is one of our favorite places to send offshore service jobs. The West's increasing exposure to the Indian economy is opening up a pipeline of cash (see

cash flow) to Indian companies.

Second, India has a growing middle class that's educated, hardworking and filled with entrepreneurial ambition. Combined, it's the recipe for a great emerging-market investment.

While the first steps in India's economic growth have been predominately in manufacturing jobs and broad customer service jobs, Indian workers are starting to move into more specialized service jobs. Financial services, information technology and research are among the more focused and advanced-level services that Indians are now beginning to provide on a regular basis. Workers in these specialized roles earn more money and help provide Indian contracting companies with the wherewithal to make an impact on the international stage.

India ETF

If you're interested in investing in an emerging economy like India, an

ETF is an attractive way to get started, because it can provide you with easier access to the market as well as professional management (see

money manager).

However, while

PowerShares

has two India-specific ETFs in its product pipeline (see

"New Passages to India for ETF Investors"), there is currently no pure India ETF that's available to investors. (To learn more about ETF investing, visit

TheStreet.com's ETF Center

.) That's not to say that there isn't anything ETF-like that's available right now if you want to add India to your portfolio.

India ETN and India Closed-End Fund

An exchange-traded note (

ETN) is a fairly new idea. Basically, instead of giving you

equity like an ETF does, an ETN is a

debt security (like a

bond) that promises to pay you the change in the

asset that it tracks. In the case of India,

Barclays' iPath MSCI India ETN

(INP)

tracks the MSCI India

Index of companies.

In terms of

share price, since an ETN's

issuer is on the hook for debt, the share price of iPath MSCI India ETN is reliant not only on the index it tracks but also on the

credit of Barclays.

ETNs are definitely something to keep your eye on. India has highly restrictive laws about non-Indian direct investment in their country. Because no Indian equities need necessarily be owned by an ETN, the idea behind this investment type is that it can open investors up to the profitability of a place like India, without all of the bureaucratic red tape (and expense) that's normally associated with investing in the country as a foreigner.

In addition to an India-centric ETN,

closed-end mutual funds have been the easiest way for American investors to get India-specific exposure in their portfolios. Like ETFs, closed-end funds trade openly on exchanges such as the

NYSE

and

Amex

.

Two India-focused closed-end funds are

The India Fund

(IFN) - Get Report

and

Morgan Stanley's India Investment Fund

(IIF) - Get Report

(both have brought triple-digit returns since the summer of 2003).

However, unlike ETFs, these (and other) closed-end funds trade at a premium or discount, which means that the share price of a closed-end fund isn't as closely tied to its net asset value (

NAV) as that of an ETF. Because Indian closed-end funds have a tendency to trade at a premium these days, it's a good idea to wait for a market correction before going too wild with these.

Know What You Own

Even though India is on the fast track to big money, its economy is not risk-free. While outsourcing is a huge boon to the Indian economy, having too large of a dependence on American interest (and money) could be a deal-breaker until the country's economy is able to sustain itself with the same degree of prosperity that it's currently enjoying.

For now, however, money is doing the talking with respect to India. Emerging-market investments are crushing expectations, and if fund managers are concerned about the amount of risk in the Indian economy, they certainly haven't been letting on to it. (To stay up to date on Indian and other emerging-market ETFs, visit

TheStreet.com's ETF Center

.)

At the time of publication, Jonas Elmerraji had no positions in any of the stocks mentioned in this column, although positions may change at any time. Jonas Elmerraji is the founder and publisher of Growfolio.com, an online business magazine for young investors.