People looking to invest in India will find SBC Warburg’s list of Indian funds interesting for what it says about the Indian equity market.

The funds market is clearly segmented. Such segmentation, in funds markets generally, tends to evolve when the underlying local market is either highly regulated, or inefficient for some tax domiciles. India is both.

Direct investment in Indian equities is only possible on successful application for FII (foreign institutional investor) status, a burden of administration which can increase investment costs.

The wrong tax domicile can hit performance: FII investors pay Indian withholding tax, 20% on dividends, 10% on long-term capital gains, and 30% on short-term capital gains unless based in Mauritius or the Netherlands Antilles. Funds structured to cope with these problems will typically be the best way to gain exposure to India for many investors.

Even those who already have FII status and who are in the right tax domicile, may still find specialist Indian funds helpful: a key to a successful investment in India, beyond the usual stock selection and market-timing skills, is to limit the effects of the still developing financial services infrastructure on performance. Market reforms, such as stock “dematerialisation” will eventually do away with many of the practical pitfalls. Until such time funds can deliver considerable added value in this respect.

Which fund subsector is the right one? Local funds can be interesting when they trade at deep discounts, but they are for the specialist, because the local funds industry standards are barely established. Most investors should choose a fund or funds from the international and FII segments.

Care should be taken with the fund type. The price of the closed-end funds can move some distance away from the NAV, and this will affect total return. In performance terms, there has been little to choose between FII and non “international” segments, even though in theory the latter should be more efficient.

Which fund? Consistency is a good criterion for fund selection in any emerging market. Our research highlighted Schroder India, the Indosuez Himalayan Fund, the MS India Investment, the India Magnum and the BZW Bombay fund. The recent appearance of a “passive” NSE 50 index fund, India Access, may be a useful addition to the menu.

Julie Hudson is associate director, Asian Single Country Funds Research, SBC Warburg in London.