The Baron India Fund has successfully navigated a volatile market landscape in the third quarter of 2025, showcasing strong relative performance and validating its strategic investment frameworks. Despite headwinds from U.S.-India trade uncertainties, the fund's focused approach on high-growth themes such as \"Make in India\" initiatives, national security, and burgeoning consumer finance opportunities has yielded positive outcomes. India's proactive economic reforms, notably the \"GST 2.0\", are poised to neutralize external challenges and sustain the nation's impressive GDP growth trajectory, reinforcing its appeal as a compelling investment destination for long-term capital.
Baron India Fund: Strategic Performance and Economic Outlook for Q3 2025
In the third quarter of 2025, the Baron India Fund experienced a decline of 6.34% (Institutional Shares), yet significantly outshone its Linked Benchmark, the MSCI AC Asia ex Japan/India Linked Index, which fell by 7.61%. This period also marked the first anniversary of the fund's conversion to an India-dedicated strategy, effective September 1, 2024. The fund's robust relative performance and effective downside protection are attributed to its unique risk management frameworks, particularly its thematic investment approach and \"S-curve analysis.\"
The quarter was characterized by increased market volatility, primarily due to rising trade tensions between the U.S. and India. The U.S. administration imposed a 50% tariff on numerous goods imported from India and introduced a $100,000 fee for new H-1B visas, disproportionately affecting Indian citizens. While these measures sparked market concern, their economic impact on India's GDP is estimated to be minor, approximately 50 to 60 basis points. Even in a worst-case scenario without trade resolution, India's real GDP is projected to grow by 6.0% to 6.5%, maintaining its status as one of the world's fastest-growing large economies.
Counter-intuitively, the H-1B visa fee may catalyze greater investment in India's global capability centers (GCCs), leading U.S. corporations to increasingly outsource IT services to India and bolster the local job market. This shift is anticipated to affect Indian IT services companies, where the fund maintains a deliberate underweight position, thereby contributing to its relative outperformance. Furthermore, the fund's limited exposure to export-oriented businesses, especially those supplying to the U.S., also played a role in its favorable results.
India's swift response to these trade challenges included a new wave of economic reforms, simplifying and lowering the Goods and Services Tax (GST). This \"GST 2.0\" initiative is expected to reduce consumer prices by 5% to 10%, boost real consumer spending, and add 70 to 80 basis points to GDP, effectively neutralizing the growth headwinds from U.S. tariffs. Towards the end of the quarter, renewed negotiations for a bilateral trade agreement signaled a more conciliatory approach from the U.S. administration, hinting at a potential trade truce in the near future. Such a resolution is expected to lead to a significant repricing of Indian equities, aligning with an anticipated earnings upgrade cycle.
From a sectoral perspective, strong stock selection within the Information Technology sector, particularly in national security (Centum Electronics Limited) and \"Make in India\"/supply chain diversification (Kaynes Technology India Limited) themes, significantly boosted relative performance. Centum, a leader in electronics manufacturing services, is well-positioned to benefit from India's growing aerospace and defense ecosystem and the government's localization initiatives. The fund's underweight stance on IT services companies, given structural growth headwinds from AI and the H-1B visa fee, also proved advantageous.
The Financials sector, specifically an investment in Bajaj Finance Limited within the consumer finance theme, also contributed positively. Additionally, strong stock selection in the Industrials sector, driven by holdings in \"Make in India\"/supply chain diversification (Shaily Engineering Plastics Limited) and power reforms (Cummins India Limited and Siemens Energy India Limited), further bolstered results. Shaily, a key supplier of injection pens for GLP-1s, is set for robust earnings growth as anti-obesity drugs go off-patent.
Detractors from performance included Max Healthcare Institute Limited due to increased business expenses for new bed capacity, Bharti Airtel Limited following slightly lower-than-expected subscriber additions, and Trent Limited due to weaker retail sales partly attributed to adverse weather.
The fund's portfolio structure emphasizes a bottom-up investment approach with a thematic overlay, focusing on high-quality, competitively advantaged Indian companies. It targets value-creating entrepreneurs, particularly in small- and mid-cap stocks where mispricing opportunities are abundant. As of September 30, 2025, the fund held 41 positions, with its top 10 investments accounting for 49.0% of net assets. Key investment themes include the Formalization of the Economy (25.1%), Consumer Finance (24.3%), Digitization (20.6%), \"Make in India\"/Supply Chain Diversification (8.5%), National Security (7.4%), Power Reforms (7.1%), and Financialization of Savings (4.1%).
Recent activity included recategorizing global security/supply chain diversification investments into national security and \"Make in India\" themes. A new position was initiated in Astra Microwave Products Limited (AMPL), a designer and manufacturer of radio frequency and microwave components, poised to benefit from India's defense indigenization efforts. The fund also increased exposure to Eternal Limited, ICICI Bank Limited, Bharat Electronics Limited, Precision Wires India Limited, Siemens Energy India Limited, HDFC Bank Limited, and Centum Electronics Limited, while exiting positions in Indus Towers Limited, REC Limited, Siemens Limited, and Thermax Limited due to concerns over earnings growth and competitive positioning.
Looking ahead, despite global geopolitical uncertainties and the rising influence of AI, the recent underperformance in Indian equities presents an opportune entry point for investors. Valuations have normalized, and India's structural growth story, supported by government infrastructure spending, tax relief, favorable inflation, and \"GST 2.0,\" positions the market for a potential earnings upgrade cycle. The Reserve Bank of India's upward revision of the fiscal year 2026 real GDP growth forecast to 6.8% underscores this optimistic outlook. The fund's limited exposure to export-oriented businesses further insulates it from trade-related risks. The U.S.-India strategic partnership, anchored in shared geopolitical objectives, is expected to strengthen, attracting global corporations seeking to diversify manufacturing and supply chains beyond China.
The performance of the Baron India Fund in Q3 2025 highlights the critical importance of a nuanced, forward-looking investment strategy in dynamic emerging markets. The fund's ability to not only withstand but also outperform during periods of significant geopolitical and economic flux underscores the value of deep market knowledge and a conviction-based approach. For investors, this quarter's results serve as a compelling reminder that even in the face of macro-level challenges like trade wars, targeted investments in fundamentally strong companies benefiting from structural domestic growth and strategic government policies can yield substantial rewards. It also reinforces the idea that market downturns, when viewed through a long-term lens, can present attractive entry points, echoing the wisdom of legendary investors to be audacious when others are apprehensive.