India-focused offshore funds, ETFs see $1.5 bn outflow in June quarter

India-focused offshore funds and exchange-traded funds (ETFs) witnessed a net outflow of $1.5 billion in three months ended June 2020, making it the ninth consecutive quarter of withdrawal, according to a Morningstar report.

This is much lower number than $5 billion outflow witnessed during the quarter ended March.

The total outflow from the category has reached to $6.5 billion so far in this calendar year (until June 2020), which is noticeably higher than the $5.9 billion outflow in the full 2019 calendar year.

It should be noted that India-focussed offshore funds and ETFs are some of the prominent investment vehicles through which foreign investors invest in Indian equity markets.

Of the net outflow of $1.5 billion witnessed during the quarter ended June, India-focussed offshore fund segment witnessed $698 million outflow, while the remaining $776 million was withdrawn by India-focussed offshore ETFs.

Flows into India-focussed offshore funds are generally considered to be long-term in nature, whereas flows into ETFs indicate predominantly short-term money.

The India-focussed offshore fund and ETF category has been seeing consistent outflows since February 2018.

From February 2018 until June 2020, India-focussed offshore funds witnessed significantly higher net outflow (of $14.5 billion), compared to net outflow (of $4.2 billion) from the offshore ETF segment.

The higher net outflow from India-focussed offshore funds indicates that foreign investors with long-term investment horizons have been adopting a cautious stance towards the country, as per the report.

"Although this is concerning, it is not entirely unexpected, given the country's current economic landscape and uncertainty over the impact of the coronavirus pandemic on the global as well as domestic economies," it added.

It, further, said the future trend of the flows in the India-focussed offshore fund and ETF category would revolve around how India fares in its fight against the coronavirus pandemic versus other comparable countries, and how the government brings the country's dwindling economy back on track amid multiple hindrances.

Despite net outflow, the asset base of the India-focussed offshore funds and ETFs category swelled during the quarter ended June, boosted by the recovery in the domestic equity markets.

Through the quarter, the assets of the category grew by almost 13 per cent to $33.8 billion from $29.8 billion recorded in the previous quarter.

This was in stark contrast to the trend observed during the March quarter, when the category's asset base shrank by a mammoth 40 per cent to $29.8 billion from the $49.4 billion recorded during the December 2019 quarter.

During the quarter under review, all three segments -- large-cap, mid-cap, and small-cap -- rebounded sharply after witnessing a significant decline in the quarter ended March.