In the fourth quarter of 2025, the Baron India Fund's Institutional Shares achieved a modest 0.42% increase, though this was less than the 4.78% rise recorded by its Linked Benchmark, the MSCI AC Asia ex Japan/India Index. This period saw notable contributions from Bharti Airtel Limited, Precision Wires India Limited, and Reliance Industries Limited, while companies like Kaynes Technology India Limited, Eternal Limited, and InterGlobe Aviation Limited acted as detractors. The fund strategically enhanced its digital sector exposure by acquiring shares in Le Travenues Technology Limited (Ixigo), India’s second-largest online travel platform, aligning with the country's accelerating digital transformation.
The fund's performance framework, adjusted following the conversion of Baron New Asia Fund into Baron India Fund in August 2024, now integrates the MSCI India Index as its primary benchmark from September 2024 onwards. Despite a 0.34% full-year decline in 2025, the Baron India Fund has demonstrated an annualized outperformance of 2.10% against the MSCI India Index since its conversion on September 1, 2024. This indicates a robust positioning and effective strategy in the Indian market, particularly when compared to its benchmark.
The fourth quarter's underperformance relative to the Linked Benchmark was largely due to the fund's significant allocation to small and mid-cap stocks and a growth-oriented investment approach. These segments lagged behind large-cap and value-oriented equities during the period. The absence of mature Indian IT service companies, which showed a recovery, also contributed to this gap. However, the fund maintains its cautious stance on these IT firms, anticipating continued earnings pressure from the advancement of artificial intelligence.
Despite global economic headwinds, India’s economy exhibited strong resilience, with real GDP growing by 8.2% in Q3 2025. The Reserve Bank of India has subsequently revised its fiscal year 2026 growth forecast to 7.3%. This economic vitality is attributed to India’s domestically driven consumption model and its reduced reliance on international trade. Proactive fiscal measures and productivity reforms by the Modi Administration have successfully mitigated the impact of increased U.S. tariffs. The expectation of a future U.S.-India trade agreement is seen as a potential catalyst for further growth in Indian equities.
From a sectoral perspective, adverse stock selection within the Information Technology and Consumer Discretionary sectors, particularly in areas like 'Make in India' and national security themes, negatively impacted performance. However, favorable allocation and strong stock selection in Communication Services, notably with Bharti Airtel Limited, partially offset these setbacks. The fund maintains high conviction in its holdings, viewing market corrections as opportunities for strategic rebalancing and increased position sizing in promising areas like food delivery and quick commerce.
Top contributors like Bharti Airtel benefited from market consolidation and rising mobile tariffs, while Precision Wires India Limited capitalized on the power sector's upswing and the growing electric vehicle market. Reliance Industries Limited demonstrated strength through its diversified conglomerate model, poised for growth in digital services and e-commerce. Conversely, detractors such as Kaynes Technology India Limited faced investor concerns regarding cash flow generation, and InterGlobe Aviation Limited experienced setbacks due to new aviation regulations affecting pilot availability. Despite these challenges, the fund remains confident in the long-term potential of these companies, driven by India's supportive policies and market dynamics.
The portfolio's structure emphasizes a blend of bottom-up investment and thematic overlays, focusing on high-quality, competitively advantaged Indian companies. Adhering to the "Baron Approach," the fund targets businesses that are gaining market share, disrupting industries, or consolidating them, leveraging deep local relationships for growth-oriented investments. The strategy includes a diversified, all-cap approach with flexibility to invest across various market capitalizations, particularly in small and mid-cap stocks where mispricing opportunities are more prevalent. The fund’s concentrated portfolio of 38 positions, with the top 10 representing nearly half of net assets, reflects a high-conviction approach. Key investment themes include Consumer Finance, Digitization, Formalization of the Economy, Power Reforms, Make in India/Supply Chain Diversification, National Security, and Financialization of Savings, all strategically weighted to align with India’s growth narrative. A unique S-curve analysis framework guides risk management, categorizing investments into phases from 'Under the Radar' to 'Market Performers/Mature Businesses', allowing for dynamic capital allocation based on growth potential and market disruption.
Entering 2026, the outlook for Indian equities remains positive, driven by anticipated earnings upgrades from increased government infrastructure spending, tax relief, stable inflation, and favorable monsoon seasons boosting rural demand. The implementation of "GST 2.0" is expected to further stimulate economic activity. While Indian equities underwent a consolidation phase in 2025, lagging behind other emerging markets due to a cyclical downturn and limited exposure to AI infrastructure, the fund believes the worst is over. The significant outflow of foreign institutional investor capital in 2025 is seen as potentially reversible, especially if the focus shifts from AI infrastructure to enterprise and consumer applications. India's deep technology talent, supportive government, and data monetization capabilities uniquely position it for long-term AI-driven productivity gains. Global hyperscaler investments in India further underscore this potential, with companies like Reliance Industries Limited poised to benefit significantly. Historically, India has been a top-performing market, and current progress towards a bilateral U.S.-India trade agreement, coupled with its status as the world’s fastest-growing large economy, reinforces the long-term growth narrative. The structural shift in household savings towards financial products also provides a stabilizing force for domestic capital markets. The fund remains optimistic about India’s multi-decadal growth, driven by economic reforms, digitization, and geopolitical realignments that favor its evolution into a global manufacturing and export hub.
