India-focussed offshore funds, ETFs see USD 1.8 billion outflow in September quarter

India-focussed offshore funds and exchange-traded funds (ETFs) witnessed a net outflow of USD 1.8 billion in three months ended September 2020, making it the 10th consecutive quarter of withdrawal, Morningstar said in a report on Tuesday.

The net outflow from such funds stood at USD 1.5 billion in April-June quarter and USD 5 billion in January-March quarter this year.

So far in this calendar year (until September 2020), the category has witnessed a net outflow of USD 8.3 billion, which is noticeably higher than the net withdrawal of USD 5.8 billion seen in full calendar year 2019, the Morningstar Offshore Fund Spy report noted.

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

Of the total net outflow from the category during the quarter ended September 2020, the India-focused offshore funds segment witnessed net outflow of USD 1.6 billion, while India-focused offshore ETFs segment witnessed net outflow of USD 218 million.

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

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

From February 2018 to September 2020, India-focused offshore funds witnessed significantly higher net outflow (of USD 16.1 billion), as compared with net outflow (of USD 4.4 billion) from India-focused offshore ETFs segment.

According to the report, higher net outflow from India-focused offshore funds indicate that foreign investors with long-term investment horizons have been adopting a cautious stance towards India.

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

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

Despite net outflows, the asset base of India-focused offshore funds and ETF category swelled during the quarter ended September 2020, courtesy the continued surge in domestic equity markets.

The category's assets grew by almost 7 per cent to USD 36.03 billion in the September quarter from USD 33.70 billion in the previous quarter.

The sharp surge in equity markets during the quarter helped the asset base of India-focused offshore funds and ETFs category to increase, the report noted.