India-focussed offshore funds, ETFs log $95 mn outflow in Sept quarter

India-focused offshore funds and exchange-traded funds (ETFs) witnessed a net outflow of $95 million in three months-ended September 2021, making it the 14th consecutive quarter of withdrawal, according to a Morningstar report released on Wednesday.

This was significantly lower than the net outflows of $1.55 billion registered during the quarter-ended June 2021.

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

The offshore fund segment witnessed net inflows, after 13 consecutive quarters of net outflows. The category garnered net assets worth $13.6 million in the September 2021 quarter, which was in contrast to the net outflows of $1.7 billion recorded in the previous quarter.

In contrast, the offshore ETF segment witnessed net outflows of $108.2 million in three months-ended September, after three consecutive quarters of net inflows.

"This is in line with expectations, given that investors who have been sitting on profits on the back of Indian markets touching all-time highs will have chosen to book them through the ETF route," the report noted.

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

Net flows

The offshore funds and ETFs category has been witnessing consistent net outflows since February 2018. The intensity reached its peak in the March 2020 quarter, as almost $5 billion left its coffers. This was the highest quarterly net outflows that the category had ever witnessed.

The intensity of net outflows did show signs of moderation during the June, September, and December quarters of 2020 as well as during the quarter ended March 2021.

However, with the second wave of the Covid-19 pandemic hitting Indian shores, the pace of net outflows again shot up, and rather sharply, in the India-focused offshore funds and ETFs category during the ended June 2021, when it lost net assets worth $1.55 billion.

But, with the scenario improving, net outflows from the category reduced sharply during the quarter-ended September 2021 and stood at $95 million.

"Foreign investors once again got attracted to the Indian shores by the relatively limited impact of the second wave of the Covid-19 pandemic on the Indian economy, a pick-up in the pace of the vaccination drive, better-than-expected corporate earnings, and expectations that the Indian economy would soon be back on the growth trajectory," the report noted.

However, the future trend of flows in the offshore fund and ETF category would revolve around how it fares against comparable economies on the growth prospects from a long-term perspective, it added.

Some of the factors will be closely watched by foreign investors to get clues – the vaccination drive and its pace and how India deals with the risk of a potential third wave of the pandemic.

Although there is an improvement on the economic front, foreign investors will be keen to see more concrete and sustainable signs of economic growth before betting on India's long-term growth story.

Despite net outflows from the offshore fund and ETF category, its asset base swelled during the quarter, thanks to a sharp fall in the net outflows number and the continued rally in the domestic equity markets.

During the three months ended September, the assets of the category grew by 11.3 per cent to $51.6 billion from the $46.3 billion recorded in the previous quarter.

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