India-focused offshore funds and ETFs (exchange-traded funds) recorded the fourth straight quarter of net inflows in the April-June 2023 period, according to the Morningstar Offshore Fund Spy report.
Before the September 2022 quarter, these funds had seen 17 consecutive quarters of net outflows. An offshore India fund is one that is not domiciled in India but invests primarily in the Indian equity markets.
The category received a net inflow of $3.19 billion during the June quarter — significantly higher than the $803-million in the March quarter.
Within the category, India-focused offshore funds witnessed net inflows of $2.42 billion — the highest since the March 2015 quarter — a massive surge from the $314 million in the March quarter.
Thanks to robust net inflows and the strong rally witnessed by the Indian equity markets, the asset base of India-focused offshore funds and ETFs jumped close to 20% to $50.6 billion, from $42.4 billion in March. Of this, offshore ETFs accounted for $11.5 billion and offshore funds $39.05 billion.
Not only that, the strong showing by Indian equities coupled with robust inflows from foreign institutional investors (FIIs) took the FII investments in India to $626 billion, a 15% surge from the earlier $542 billion in March.
The India-focused offshore funds and ETFs delivered a return of 11.9% during the quarter. However, the category underperformed the MSCI India USD Index, which gained 12.4% during the same period.
Of the universe of 286 funds under consideration in this report, only 83 managed to outperform both the category average as well as the MSCI India USD Index during the quarter.
Significantly, it was during this period that the Indian indices witnessed a strong recovery from their March lows. The Sensex registered a gain of 9.71% through the quarter, while the mid- and small-cap segments were the major beneficiaries among sectoral indices.
The BSE MidCap surged by 19.57%, while the BSE SmallCap appreciated by 20.94% during the period under review.
However, while the category has performed slightly better over the past year, it still lags the index over a three-year period.
According to the report, most India-focused offshore funds are actively managed and have expense ratios substantially higher than ETFs. Their continuing popularity indicates that foreign investors prefer active management when investing in India.
On the other hand, a lower expense ratio is helping offshore ETFs gain traction. They also offer easy exit options and are more cost-efficient than funds, many of which charge for early exits.