Is India the new China?


India is starting to happen, investors.

The world’s second most populous nation — largely ignored for its lackluster growth, rampant poverty, and inadequate infrastructure — is shaping up to be the next hotbed of international investing.

The Reserve Bank of India has just cut its rates. Economists were generally expecting a 25 basis-point cut, but they got a heartier 50 basis points instead. After growing its economy at a 6.1% clip in the final quarter of last year — a two-year low, but clearly ahead of where most developed nations are at this point — India doesn’t want to take any chances.

India has its problems, of course. However, the challenges are different than the restrictive worries that often keep investors of Chinese equities up at night. India isn’t threatening to shut down the Internet when the news isn’t favorable. If anything, India’s Draft National Telecom Policy is taking aggressive steps to broaden broadband access throughout the country.

Rupee slippers
After an uninspiring 2011, investors are starting to pay attention. Dreyfus India — a U.S. mutual fund that naturally invests in companies in India — has gained more than 30% this year.

Tata Motors (NYSE: TTM) , India’s leading automaker, may not be a household name stateside outside of its Jaguar Land Rover arm, but the real story here is Tata’s smaller — and typically far cheaper — automobiles. Tata is the world’s third-largest automaker in the small-car market, and worldwide sales soared 26% last month.

Here in Australia, when we think of India, we think of iron ore, and therefore of companies like BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO), Fortescue Metals Group (ASX: FMG) and even Atlas Iron (ASX: AGO) and Mount Gibson Iron (ASX: MGX).

But will India make a big difference to them? Likely only insofar as Indian demand will keep iron ore prices at their elevated highs, even as more and more supply comes on stream in the years ahead.

Betting on the lot
Instead of singling out individual winners — and there aren’t that many that trade on stateside exchanges — investors can buy into a basket of stocks through mutual funds.

There’s certainly nothing wrong with Dreyfus India, but the smarter bet may be U.S. listed  India Fund (NYSE: IFN) .

As a closed-end fund, India Fund trades throughout the day on the New York Stock Exchange. Most closed-end equity funds actually trade at a discount to their net asset values, and India Fund was recently trading at a nearly 10% discount.

India Fund hasn’t kept up with Dreyfus India this year, but it’s a smart and discounted play on a promising country that’s starting to come into its own.

It’s too early to give up on China. However, it’s also a good time to begin delving into the mostly forgotten opportunities of buying into India.

It’s a small, small world
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This article, written by Rick Munarriz, was originally published on Fool.com. It has been updated.

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