Reforms provide a gateway to India Investors keen to take advantage of India's dramatic new economic reforms should consider Indian funds as the best way to ride the growth story, say advisers. Manmohan Singh, the prime minister of India, this month announced a "rush of reforms" to attract more foreign capital and reinvigorate the country's slowing economy. The proposals, more radical than expected, relax the direct investment rules that control access to India for foreign investors in five sectors: retail, civil aviation, power, trading exchanges and broadcasting. This will make it easier for multinationals to enter the Indian market and serve its 1.2bn people. Foreign investors welcomed the news, as did private investors in the UK - also keen to benefit from any potential growth. The main Indian stock market index, the Bombay Stock Exchange Sensex, rose on the news while the rupee, after a steep decline this year, also recovered some lost ground. Rahul Sharma, retail analyst and managing director at NeevCapital, said one of the key problems in India has been the fall in investment. Walmart, Tesco and Carrefour were gearing up to build supermarkets last year, but the Indian government backtracked on reforms allowing them to enter the market following political opposition and a public outcry from small retailers. Take Aim for India Investors keen to benefit from India's growth story can't yet buy shares there - but they can get exposure via Indian companies" shares traded on London's Alternative Investment Market (Aim). Experts say investors often avoid smaller companies because they fear they are too risky, but some small and mid-cap Indian stocks have provided handsome returns this year, despite the downturn. For instance, Aim-traded International Mining and Infrastructure Company (IMIC) might be tiny - its market capitalisation is just £17m - but its shares have risen by 65 per cent over the past year. Shares in OPG Power Ventures, an Indian electricity company, are up by 40 per cent. Mike Foster, an analyst at Hardman & Co, a research company, adds a word of warning: "Indian companies quoted on Aim generally underperformed both the domestic Indian market and the London market during the second quarter of this year," he says. The biggest price falls were to be seen in the energy sector. "The problem with energy companies is that they get caught up with the politics," says Foster. We would only favour energy companies that can source coal both domestically and internationally. Instead, he tends to favour companies that can benefit from global Indian consumer trends, such as Bollywood film distributor Eros International. For those who prefer larger-cap shares, metals refiner Vedanta Resources and conglomerate Essar Energy trade on the main market and enjoy more analyst coverage. "These reforms have got people very excited because it effectively opens up the retail and aviation market," says Sam Mahtani, director of emerging market equities at F&C and manager of the F&C Indian investment fund. But the most important thing is the signal that these reforms have sent - it shows there is a change in attitude to foreign investors. Mahtani says international companies already doing business in India such as Hindustan Unilever, British American Tobacco's Indian joint venture, ITC and BP, which has a stake in Reliance Industries could all benefit from the proposals. He also invests in large Indian corporates such as HDFC Bank, ITC, Hindustan Unilever and ICICI Bank in his fund. But the latest proposals are not an end in themselves, warns Brian Dennehy, managing director at FundExpert.co.uk. "Walmart alone cannot transform and modernise India - but this is a profound, if small, first step which can transform confidence in the future, and, for example, persuade Indian companies to dust off mothballed investment plans," he says. Early progress with the likes of Walmart and Ikea, creating jobs and helping subsistence farmers from whom they will buy direct, will encourage more progress, with the growing support of a youthful electorate. Despite a recent slowdown, India's economy is growing strongly and the demographics are very positive, says Caroline Keen, alternate manager of Newton Asian income funds. Unconstrained by one-child policies, India's population is growing at three times the speed of China's and, by 2025, it is forecast to overtake China as the world's most populous nation, when it is expected to be home to 1.4bn people. That hasn't translated into great investment returns, though. According to Lipper, the BSE Sensex has fallen 23 per cent over the past two years and by 11 per cent in the past year. But advisers believe this could change. Dennehy says: "The stock market has just broken upwards, and there is a very real possibility that the two-year downturn is over, and a new bull market in Indian shares is anticipating a renewed long-term boom for the Indian economy." It's hard to buy Indian shares directly unless you are an Indian national. But there are a number of funds - both unit and investment trusts - that invest in India. Jason Hollands of advisory firm Bestinvest says most clients will get exposure to India via a global emerging market fund, such as First State Global Emerging Market Leaders. If investors want a specialist fund, he recommends Aberdeen Global Indian Equity, which has returned 55.17 per cent over five years according to Lipper. Indian companies listed on Aim Price (pence) 25 September 2012 Price % change 31/12/11-25/9/12 Indus Gas OPG Power Ventures iEnergizer Unitech Corporate Parks Source: FT research "Despite periodic cases of corruption and the frustrations that come with the political system it is worth remembering that unlike its emerging market rival China, India is a vibrant democracy with developed institutions and the rule of law," says Hollands. Patrick Connolly at AWD Chase de Vere also believes that India is likely to perform well over the long term and so should have a place in client portfolios. However, he says a lack of effective spending on infrastructure, inadequate economic reforms and political issues could mean that India doesn't fulfil its potential in the shorter term - and stock market performance could be particularly volatile. "Because of the high risks we don't recommend that clients buy funds investing specifically in India, but rather get exposure through broad-based emerging markets funds." he says. He recommends JPM Emerging Markets, which has 10 per cent invested in India, and he also likes the First State Global Emerging Market Leaders, which has 7 per cent in India. Mick Gilligan of broker Killik & Co points out that India tends to be an expensive market to invest in. He too believes investors are better off getting exposure via a broader Asian or emerging market fund. For those who want more direct exposure he recommends the First State Indian Subcontinent Fund, which he says "tends to be conservatively managed with an emphasis on companies demonstrating good corporate governance." Indian equity funds Total % return, with dividends reinvested to Aug 31, 2012 5 years Aberdeen Global - Indian Equity BGF India Fund Fidelity Funds - India Focus First State Indian Subcontinent Franklin India A HSBC GIF Indian Equity Invesco India Equity A JF India A Neptune India A Schroder ISF Indian Equity Bombay Stock Exchange 100 Index All equity funds in IMA "Specialist" sector. Another way to profit from growth in India is to invest in companies that have distribution in India. Daniele Gianer at the Dominion Global Trends consumer fund likes Inditex, the Spanish retail group that has introduced Zara stores in the country in a joint-venture with the Tata group. Most advisers tend to agree that investing in India is risky. "Some question marks remain for investors, including doubts about further reforms and liberalisation," warns Esty Dwek, investment strategist at HSBC Private Bank. A key worry remains inflation, which may be further exacerbated by the jump in food and energy prices this summer . . . India is also one of the few Asian countries to have poor government finances, which may remain an obstacle for investors, at least until further reforms are undertaken to ease the financial burden.