Investors looking to make a play in India should buy this cheap fund

India is well and truly back in fashion. The stockmarket has gained 25% in six months as investors rattled by last year’s turbulence have come storming back. In 2012 India’s growth rate slowed to under 6% and structural reforms to boost growth seemed to have been put on ice.

But now the outlook is improving. “Consumption and investment are showing early signs of bottoming out,” says Morgan Stanley. What’s more, inflation has eased to a three-year low, providing scope for the central bank to cut interest rates.

Reforms also appear to be back on track. There has been a “genuine effort” to trim the government’s subsidy bill, judging by revisions to the pricing regime for diesel, says Royal Bank of Scotland. In December, measures were finally passed to liberalise the retail sector by allowing investment from foreign supermarket chains. Goldman Sachs reckons that the reforms can lift growth above 7% in 2014.

Future governments will have to keep liberalising the highly regulated economy “in the face of stiff political opposition” if India is to fulfil its long-term potential, says Victor Mallett in the FT. There’s still plenty of ground to make up: in 1950 India and South Korea had the same GDP per capita. Now the latter’s is 22 times bigger.

Despite the market’s sharp rise, MoneyWeek’s favourite play on India’s development, the New India Investment Trust (NII), still looks worth tucking away on a discount to its net asset value of 11%.

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