Investing in India - different strategy?

When I compare the Indian market and the investment instruments available there (Mutual funds in particular) with the US market and its available funds, I see the following, that could have a bearing on what kind of an Investment strategy might work in India.

• As compared to the US market, the Indian market is quite "inefficient", meaning that it is not as hard to beat the overall market indices in perfomance. This is proved by the fact that a majority of actively managed funds consistently beat the index. The reverse is true in the US. So in my opinion, true indexing has not (yet) come of age in India, but will in the future as the markets get more efficient.
• Average Mutal Fund expenses in India are quite high (in the 2% - 2.5% range for equity funds). In addition to the high expenses, most equity funds charge a 2% - 2.5% front end load which makes the overall expenses bordering on absurd. The Indian markets have not seen a significant down year in the last 4 years or so and that is why not many people are concerned about these loads and expenses....reason being that if your fund is making 60% in the year, whats 5% in expenses in loads. But if your fund has a negative return year....hmmm the fees and loads hurt a lot more.
• From a tax perspective, investing in India is a dream. Long term Capital gains tax (if you hold for 1 year or more) for equity oriented funds is zero - zilch - nada and LTCG on debt funds are 10%. These make for HUGE advantages (as compared to US taxation) when it comes to tax savings.
• Debt Mutual Funds are not as popular in India. Due to the extended bull market in equities and a rising interest rate environment, debt instruments have taken a back seat. Also, they dont enjoy the favourable tax treatment like equity funds. Lets wait for the first signs of an extended bear market and things may change in favour of debt instruments.
• A lot of people in India still believe that Whole Life Insurance policies (ULIP schemes) are the solution to their long term financial troubles. As a result (unfortunately), these horribly expensive and mediocre perfoming schemes are still very popular.
• As far as overall volatility is concerned - India, an emerging market is a whole lot more volatile than the US markets. In my portfolio, I have seen swings of 30% in a matter of months.
• A big drawback in the Indian markets is the lack of any decent international funds. So the average indian investor cannot diversify outside of India. It is high time the Indian Fund houses stop dishing out 5 versions of what is essentially the same fund and concentrate on opening up some new international funds to their investors. I read an article recently that this is indeed in progress - hopefully they will come out with something soon.

Given all of the above, what could be a good investment strategy in India? IMHO

1. Pick funds with lower than average expenses and loads in their respective category
2. Invest via the SIP route (Systematic Investment plan). This will help protect your investments against the perils of a volatile market. Also, most funds cut down on the FE load if you invest via SIP
3. Diversify across fund houses (managers)
4. Do a mix and match of index funds and actively managed funds. Since India is not yet an "efficient" market, pure indexing may not work as well as active management
5. Stay away from sector funds and NFO (new fund offerings)
6. Learn to accept volatility and invest only for the long term (and by long term I mean more that 3 - 5 years). I heard some "expert" on TV the other day saying that that "long" term means 6 months or more :-)

Fund picks coming up next........