India-focused funds see outflows of $2.5 billion in 2016

Except for September quarter, which had net inflows of $196 million, all other quarters had outflows

The year 2016 was the year of outflows for India-focused offshore funds and exchange traded funds (ETFs). After witnessing robust inflows of $2.5 billion in 2014 and $4.3 billion in 2015, the category saw net outflows of $2.5 billion in 2016.

Except for the September quarter (net inflows of $196 million), all other quarters witnessed net outflows, data from Morningstar India shows. December saw India-focused offshore funds and ETFs posting net outflows of $439 million.

Funds that saw the most inflows during the year included Nomura India Equity ($1,024 million), iShares MSCI India ($259 million), PineBridge India Equity Y ($184 million), Jupiter India ($158 million) and First State Indian Subcontinent II ($80 million). Aberdeen Global Indian Equity saw the biggest outflow in 2016 to the tune of $870 million. Other big outflows were in seen in funds Parvest Equity India C D ($439 million), WisdomTree India Earnings ETF ($336 million) and SMAM High Growth India Mid-Cap ($264 million).

Six of the 10 largest funds in this category have given negative returns in 2016, with Franklin India I Acc EUR emerging the top performer with returns of 3.1 per cent.

SBI Resurgent India Opportunities Fund, with assets of $4 million, was the top performing fund in this category clocking returns of 25.1 per cent, outperforming both the MSCI India USD Index (down 1.4 per cent) and the category average (down 0.1 per cent) by a huge margin. While the fund was a large-cap fund until some time ago, since 2013 the portfolio's allocation to mid/small-cap stocks has increased consistently.

Mirae Asset India Mid-Small Focus, a diversified equity fund with a focus on investing predominantly in small/mid-cap stocks in India, was the third-best-performing fund over a one-year period, with gains of 10.4 per cent.

In 2016, higher amounts of investment moved out of India-focused offshore equity funds compared with India-focused offshore ETFs, indicating that long-term investors still have reservations towards investing in Indian equities, according to Morningstar India. As of December 2016, India-focused offshore equity funds witnessed net outflows of $1.8 billion against net outflows of $0.7 billion from India-focused offshore ETFs.

An offshore India fund is one that is not domiciled in India but invests primarily in Indian equity markets.

The December quarter, during which the BSE Sensex shed 4.4 per cent, saw outflows in India-focused offshore funds and ETFs, with assets of these funds dipping 8.5 per cent to $40.8 billion from $44.4 billion in the previous quarter. The category registered a loss of 9.2 per cent (in USD terms) during the quarter, underperforming MSCI India, which dipped 8 per cent.

In terms of outflows for the quarter, offshore ETFs witnessed net outflows of $424 million, whereas offshore funds registered net outflows of about $15 million. At the end of December, these funds constituted about 24 per cent of the total offshore funds assets in Indian equity markets.

According to Morningstar India, the surge in US dollar against the rupee following the unexpected win of Donald Trump as US President, a rate hike by the Fed as well as the delay in the revival of domestic economy and uncertainty over the impact of demonetisation on the economic growth rate, prompted foreign investors to adopt a cautious approach and pull money out of emerging markets including India.