India-focused funds, ETFs see four quarters of outflows; asset base swells

Regionally-diversified offshore funds and ETFs increase allocation to India, shows Morningstar report

India-focused offshore funds and exchange traded funds (ETFs) saw net outflows during the quarter ended September, the fourth consecutive quarter of net outflows for the category.

Net outflows stood at $95 million, down sharply from the outflows of $1.5 billion seen in the previous quarter, according to Morningstar’s latest Offshore Fund Spy report. The surge in the Indian equity markets helped the asset base of India-focused offshore funds and ETFs soar over 11 per cent to $51.6 billion from the $46.3 billion in the previous quarter. The percentage allocation of these funds in the total offshore fund assets of Indian equity markets dipped marginally from 15 per cent to 14.5 per cent in the quarter ended September compared with the previous quarter.

The India-focused offshore funds and ETF category returned 10.6 per cent during the quarter, underperforming MSCI India USD Index, which returned 12.7 per cent. This was in a period when the S&P BSE Sensex gained 12.7 per cent, S&P BSE Midcap 12.1 per cent and S&P BSE Smallcap Index 11.3 per cent.

The allocation to Indian equities by other regionally diversified offshore funds and ETFs rose to an estimated $303 billion during the quarter, up 9 per cent from the $278 billion recorded in the previous quarter, according to the Spy report. This category includes Asia/Asia-Pacific funds, emerging[1]markets funds, and global funds with a partial allocation to Indian equities along with exposure in other markets globally. The allocation of these funds towards India has risen by 3.9 percentage points, 3.2 percentage points and 0.1 percentage point respectively over the past year.

Funds that received highest net inflows during the quarter were Fidelity India Focus A-USD ($169 million), GS India Equity I Inc USD ($163 million), Ashoka India Opportunities A USD Acc ($137 million), UTI India Dynamic Equity USD Instl ($74 million), and Stewart Inv Indian Subcontinent Sustainability A GBP ($71 million).

The assets of the 10 largest India-focused offshore funds and ETFs continued to swell, touching $22.3 billion at the end of September from $20.1 billion in the quarter ended June, registering a gain of 11 per cent. These funds account for almost 50 per cent of the India-focused offshore fund and ETF category's assets.

“Some of the factors would be closely watched by foreign investors to get clues: the vaccination drive and its pace and how India deals with the risk of a potential third wave of the pandemic. Although there is improvement on the economic front, foreign investors would be keen to see more concrete and sustainable signs of economic growth before betting on India's long-term growth story,” said Himanshu Srivastava, Associate Director–Manager Research, Morningstar Investment Adviser India.

Offshore mutual funds form an important component of total foreign institutional investment, apart from other large FIIs, such as offshore insurance companies, hedge funds, and sovereign wealth funds. Offshore mutual funds investing in India can be divided into two groups/categories: India-focused offshore funds and ETFs (investing only in India) and regionally diversified offshore funds and ETFs (or funds having a partial allocation to India).