India-focussed offshore funds and Exchange Traded Funds (ETFs) witnessed a net outflow of USD 986 million in the three months ended December 2020, making it the eleventh consecutive quarter of withdrawals, according to a Morningstar report released on Tuesday.
The quantum is much lower than USD 1.8 billion outflow witnessed during the quarter ended September.
In the entire 2020, the category witnessed a net outflow of USD 9.3 billion, which was noticeably higher than the net outflow of USD 5.9 billion seen in 2019 and USD 5.3 billion in 2018.
India-focussed offshore funds and ETFs are some of the prominent investment vehicles through which foreign investors invest in Indian equity markets.
During the quarter ended December 2020, the offshore fund segment registered net outflows to the tune of USD 1.9 billion.
On the contrary, offshore ETF segment witnessed a divergent trend as it received net inflows over USD 800 million after five consecutive quarters of net outflows.
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-focused offshore funds and ETF category have been witnessing net outflows since February 2018. The intensity had reached its peak in the March 2020 quarter as almost USD 5 billion left its coffers. This was the highest quarterly net outflow that the category had ever witnessed.
Although net outflows continued during the June, September, and December quarters of 2020, their intensity moderated considerably.
The 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 how soon India will be back on growth trajectory. That said, India equities continue to attract foreign investments through direct equity as well as the ETF route,” it noted.
Further, it said the future trend of the flows in the India-focused offshore funds and ETF 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 economy back on track amid multiple hindrances.
Going ahead, the report said launch of the COVID vaccine in India and the measures announced by the government in the Union Budget to boost the economy should help in the reversal of this trend.
Despite net outflows, the asset base of the India-focussed offshore funds and ETFs category swelled during the quarter ended December, helped by the continued surge in the domestic equity markets.
Through the quarter, the assets of the category grew by almost 19 per cent to USD 43 billion from USD 36 billion recorded in the previous quarter.
During the quarter under review, the S&P BSE Sensex index surged 25.4 per cent whereas the S&P BSE Midcap and S&P BSE Smallcap indices shot up by 22 per cent and 21.7 per cent, respectively.