India-focused offshore funds, ETFs see inflows for fourth quarter in a row

India-focused offshore funds segment witnessed net inflows of $2.42 billion in the June quarter, the highest net inflow since the quarter ended March 2015, when the segment received a net inflow of $3.34 billion, according to a report by Morningstar.

India-focused offshore funds and ETFs are some of the prominent investment vehicles through which foreign investors invest in Indian equity markets.

This was the fourth quarterly net inflows for the segment in a row
 Prior to that, over the past 17 quarters starting with the quarter ended June 2018, there were net outflows in 16 quarters.

Monthly Net Flows Q2 2023 (in USD Millions) 

"This recent series of net inflows is a welcome change and of significant importance. Despite challenging times and an uncertain global economic environment, the Indian economy and markets have been resilient compared with other economies. Moreover, there is a positive economic growth outlook for India, which has attracted foreign investors with a long-term perspective toward Indian markets. On a month-on-month basis, except for March 2023, the segment has received net inflows consistently from August 2022 until June 2023," said Himanshu Srivastava, Associate Director at Morningstar.

 Since August 2022, India-focused offshore funds have received net inflows of $3.42 billion whereas in calendar 2022, the segment witnessed net outflows of $900 million, significantly below the net outflows of $3.5 billion in 2021.

Higher flows into India-focussed funds implies foreign investors have started to view India as a long-term investment

"Higher flows in the India- focused offshore funds segment compared with India-focused offshore ETFs signifies that foreign investors have started to view India as a long-term investment destination after a long gap. Having said that, how long this trend can endure needs to be evaluated over a longer time. It would depend on how the global macroeconomic environment plays out in the near to medium term," said Melvyn Santarita, Research Analyst – Manager Research at Morningstar Investment Adviser India.

Assets of India-Focused Offshore Funds and ETFs Surged

The asset base of the India-focused offshore funds and ETFs category swelled 19.2 per cent to $50.6 billion during the quarter ended June 2023 from $42.4 billion in the previous quarter,  following the sharp rally in the Indian equity markets and robust net inflows. 

"Most India-focused offshore funds are actively managed and have expense ratios substantially higher than those of ETFs. Their continuing popularity, despite higher expenses, indicates that many foreign investors prefer active management over passive when it comes to investing in India," said Srivastava.

On the other hand, the offshore ETFs' lower expense ratio is  helping them gradually gain traction and increase market share. ETFs also offer easy exit options and are more cost- efficient than funds, many of which charge for early exits. "Given these benefits, investors recently have used this mode of investment extensively to easily move in and out of the country's equity markets, in line with their fast-changing views on the investment opportunity it offers," said Srivastava.

Kotak India Midcap A USD ACC gets highest inflows in June quarter

During the June 2023 quarter, Kotak India Midcap A USD Acc received the highest net inflows of around $487 million. This is a huge jump in its net inflow numbers from the previous quarter when it received a net inflow of USD 55 million. This quarter witnessed a strong performance from the mid- and small-cap segments, and this fund benefited from this trend in the form of huge net inflows.

It was followed by SMDS High Growth India Mid-Cap Equity and iShares MSCI India ETF USD Acc, with net inflows of $297 million and $237 million, respectively.

Kotak India Equity 1 topped the chart of funds that were hit the worst, with net outflows of $108 million, followed by iShares MSCI India Small-Cap ETF, which witnessed net outflows of $16 million, mostly on account of profit booking during the quarter.

Overall, 86 funds out of the total 286 witnessed net outflows amounting to $252 million. Last quarter, the trend was 104 funds witnessing net outflows amounting to $774 million. The remaining funds received net inflows amounting to $3,439 million. 

The assets of all the funds in the top 10 list surged during the quarter. 

IShares MSCI India ETF continues to retain its top spot as the largest fund in the India-focused offshore fund and ETF category. During the quarter, it received net inflows of $ 71 million, and its asset size grew by 12.1% to $5.07 billion from $4.52 billion in the previous quarter, tracking the gains in the Indian equity markets.

Kotak India Midcap A USD Acc recorded the highest growth in assets of 41.36%, driven by strong returns and a quarterly net inflow of $487 million. 

AbrdnI-Indian Equity A Acc GBP recorded the lowest growth in assets of 9.15%.
 

Factors that will determine FII investment strategy:

Foreign investors would also look for cues from the global inflation and economic growth fronts and the US Fed's decision on interest rates going ahead. How long the geopolitical scenario stays under stress caused by the war between Russia and Ukraine and how the economic scenario unfolds in the US and Europe would also have an impact on flows into the India- focused offshore fund and ETF category, as per the report.

 On the domestic front, the buildup of inflationary pressure has already led to rate hikes by RBI. While there has been a pause for a while, there is still some uncertainty

related to interest-rate direction in the near term. Hence, investors would focus on how the country traverses the path of economic growth under a high-interest-rate scenario.

The valuation of the Indian markets, growth in the domestic economy, and currency movements would also be major drivers that would determine the flow trend in the India-focused offshore fund and ETF category.