India-focused offshore funds, ETFs mop up $2.6 billion in Q1

Combined assets grow 10.2% to $55.2 bn, boosted by robust inflows and a rally in Indian equities

India-focused offshore funds and exchange-traded funds (ETFs) continued to receive robust flows during the June quarter (Q1), with inflows of $2.6 billion, higher than the $2 billion received in the previous quarter. Total assets of the 10 largest India-focussed offshore funds and ETFs grew 7.5 per cent to $27.3 billion. Two Japan-domiciled funds mopped up $1.2 billion of the inflows, the most within the category.

In the six months to June, the category received net inflows of $4.6 billion compared with net outflows of $2.3 billion in Q1 of FY17, according to a note put out by fund tracker Morningstar India.

India-focussed offshore funds saw higher net inflows than India-focussed offshore ETFs during Q1. The former got inflows of about $2.1 billion compared with $0.5 billion for the latter.

Their combined assets grew 10.2 per cent to $55.2 billion in Q1, boosted by robust inflows coupled with a rally in Indian equities. Of this, ETFs made up $11.5 billion while the offshore funds contributed $43.7 billion of the assets. The benchmark BSE Sensex rose 4.4 per cent in the June quarter.

According to Morningstar, most India-focussed offshore funds are actively managed and have an expense ratio of about two per cent compared with 0.8 per cent for the ETFs. “Their continuing popularity, despite higher expenses, indicates that many foreign investors prefer active management over passive exposure when it comes to investing in India,” said Himanshu Srivastava, senior analyst, Morningstar Investment Adviser India.

Nomura India Equity, a Japandomiciled fund, was the biggest beneficiary during the quarter with net inflows of $790 million, significantly higher than the $257 million it received in the previous quarter. Its net flows over a one-year period amounted to about $1.9 billion, the highest among India-focussed offshore funds and ETFs. Nomura Asia Series Nomura India Focus and Jupiter India got the second and third highest net inflows in the quarter to the tune of $378 million and $267 million, respectively.

The total assets of the 10 largest India-focussed offshore funds and ETFs at the end of June 2017 were estimated to be about $27.3 billion against $25.4 billion during the previous quarter. These constitute almost half of the overall assets of the offshore-India universe. The top 10 funds include three ETFs — iShares MSCI India, WisdomTree India Earnings ETF, and Lyxor MSCI India ETF C — together contributing about $8.3 billion.

Aberdeen Global Indian Equity Fund saw the worst outflows during the quarter to the tune of $299 million against a net outflow of $180 million in the previous quarter. Its assets stood at $3.3 billion at the end of June.

iShares MSCI India retained the top spot as the largest India-focussed offshore fund and ETF during the quarter. Robust inflows helped the fund’s asset size grow to $5 billion from $4.7 billion in the previous quarter, according to Morningstar. Franklin India A (acc) was in the second spot with assets of $4.3 billion in June, while Nomura India Equity was number three with assets of $3.3 billion.

Notably, earlier this month, the income tax department further relaxed conditions for offshore funds from 121 countries to encourage overseas fund managers shift base to India. The Central Board of Direct Taxes (CBDT) did away with three tough conditions that prevented fund managers from shifting to India. These conditions apply to funds set up by Category-I and -II of foreign portfolio investors shifting to India from these 121 countries. These would not be treated as the permanent establishment of the funds.