Look to India, the next economic powerhouse

Whilst the strong economic development in China has dominated headlines over the last 10 years, India is likely to overtake China with annual growth above nine per cent. It is poised to become the fastest growing economy in the world in the next five years.

Over half India's 1.2 billion population is under 25 years and highly aspirational, providing a vast consuming class which will drive domestic demand. Unlike China, it is a recognised democracy and therefore carries far less political risk.

Following chronic under-investment in infrastructure since 2000, the new Indian government has an ambitious spending programme – an impressive $1.7 trillion – which will act as a key driver of economic growth in such areas as power and railways.

Historically, India has been constrained by a bureaucratic political system and enormous amounts of red tape hindering business.

However, the government now has a genuine mandate for change. "We remain very optimistic about the outlook for those Indian companies with true competitive advantages," says Mike Gush, portfolio manager at Pacific Horizon.

Last week's announcement that India is to embark on an ambitious plan to provide all 630,000 villages – no matter how remote – with broadband internet access by May 2012 shows how far it is moving. It will use the internet to improve education and health services.

The country has also restarted the denationalisation programme. Earnings growth "of at least 20 per cent per annum can be expected for the next few years", predicts Mahtani.

When looking at Indian funds available to savers here, check how much is placed in particular sectors.

Metals and mining, for instance, should benefit from robust demand led by infrastructure growth.

There will also be an explosion in demand for financial services since currently there are only 50m bank accounts and 20m credit cards in operation.

Pharmaceuticals form a third theme with Indian drug companies well positioned to benefit from a low cost base and integrated business models.

Whilst investors can purchase shares directly in forward looking companies in these sectors – such as Jindal Steel & Power, Ranbaxy and Axis Bank – the dealing costs may be high and diversity through a collective fund gives lower risk.

According to Lipper research, the five British-based star funds,

showing their growth over 12 months to the end of February, are:

n Jupiter Indian, up 108 per cent;

n First State Indian, up 98.9 per cent;

n New India, up 94.4 per cent;

n Neptune India, up 88.8 per cent;

n JP Morgan Indian, up 77.6 per cent.

Two of these funds are investment trusts – JP Morgan Indian and New India – and offer monthly savings plans from 50 and 100 respectively. It's also possible to use them for your Individual Savings Account (or ISA) and, again on a monthly basis, each accepts from 100 for this tax-efficient form of saving.

The JP Morgan Indian, founded in 1994, was one of the pioneers. The managers are a notably strong emerging markets team and focus company visits. The trust has gross assets of 470m.

Unlike a unit trust, an investment trust has a separate independent board of directors and the facility to borrow ('gear' in financial speak) temporarily to acquire an under-valued asset.

There are also Indian funds which are open to UK investors but based abroad, such as Dublin or Luxembourg.

Look here particularly (with their one year performance to the end of last month), according to Lipper, for:

n HSBC GIF Indian Equity, up 138.5 per cent;

n Goldman Sachs India Equity, up 121.2 per cent;

n Fidelity Focus, up 118.2 per cent;

n Morgan Stanley Indian Equity, up 102.6 per cent;

n Standard Life Indian Equities, up 101.2 per cent.

When investing in India, take the long-term view (at least five years) and accept a fair degree of volatility along the way. In the last year, the influential Bombay Sensex index of stocks has moved between 8,047 and 17,790 and – like most of the world's stock markets – is currently close to its upper limit.

Leeds stockbrokers Charles Stanley like both Jupiter Indian (whose manager has 12 years' experience of investing in India) and Aberdeen India Opportunities.

Martin Payne at Brewin Dolphin brokers in Leeds notes that India is less reliant in exports than China: "To some extent, India is a 'self contained' growth story."

He says the biggest problem currently is inflation which is expected around seven per cent this year, adding: "Interest rates will inevitably rise. China is currently leading policy tightening and India will not be far behind."

Payne considers India one of the more expensive markets in the world and says it could prove to be a bumpy year. He likes Jupiter India, First State Indian (a smaller fund of 65m to Jupiter's 140m) and JP Morgan Indian.

He is impressed with the emerging markets team at First State which has selected around 50 holdings for its Indian fund.

Jupiter India was launched two years ago and has taken 140m, spread in 60 stocks. The selectors will not consider a company where access to the management is not readily provided.

Newton's Asian Fund Manager, Ewan Markson-Brown, expects "growth between 6-8 per cent for decades" in India and says it is one of the "few countries in the region where the economy is relatively immune to global growth fluctuations".

There are also non-specialist collectives with a fair weighting in India, notably many with the acronym BRIC, standing for Brazil, Russia, India and China.

The UK-based funds with the greatest amount invested in India are Excel BRIC (26.1 per cent), CAAM Islamic BRIC (25 per cent), ISI BRIC Equities (23.6 per cent) and BNP Paribas BRIC (21.4 per cent).

Leading the way out of recession

Chartered accountant Roger Webb from Ilkley has held Indian funds for several years. "India will lead the world out of recession," he says.

The 67-year-old does not have a pension and so is building up his investment portfolio and one for his wife, Christine. His Indian choice is the JP Morgan Indian Investment Trust where he makes lump sum savings.

TD Waterhouse of Leeds are his stockbrokers who Roger describes as "excellent".

TD Waterhouse is currently discounting its charges on some 1,300 funds which means that there is no purchase trading fee with Allianz Global, First State, Jupiter or Neptune and in some cases zero initial charge. Away from finance, Roger enjoys chess, bridge and playing tennis in the Wharfedale League.