India-focused funds continue to see robust inflows

After sharp outflows in August and September, the Indian market is once again experiencing a positive investment spell from overseas investors. Foreign portfolio investors (FPIs) have poured nearly $3 billion into domestic stocks since August. A large part of these flows have come from India-focused offshore funds. These are actively managed funds that exclusively invest in select Indian securities, unlike exchange-traded funds (ETFs) which track indices such as the Nifty 50 or the S&P BSE Sensex.

In October, India-focussed offshore funds received inflows of $573 million, while India-focussed offshore ETFs saw net outflows of $31 million, the data from Morningstar Investment Adviser India shows.

“The good news is that money continues to flow into India-focussed offshore funds, considered more longterm than offshore ETFs. Even during the months when the overall flow from FPIs was negative, its subset of Indiafocused offshore funds continued to receive net inflows,” said Himanshu Srivastava, senior research analyst, Morningstar Investment Adviser India.

On a year-to-date basis, the category as a whole has seen inflows of $6 billion, with offshore funds contributing $5.3 billion and ETFs $0.7 billion. In the past four months, offshore ETFs saw outflows to the tune of $267 million.

This year, FPIs have increased their exposure to financial services and basic materials, which are seeing a turnaround with a rebound in global commodity prices. They continue to trim exposure in health care and technology, largely due to headwinds these sectors have been facing. Despite trimming exposure, technology continues to be the fourth largest sector in their portfolio. The other top sectors include financial services, consumer cyclical, basic materials and industrials.

“Their portfolios are largely focused on the pick-up in domestic growth recovery and increase in urban consumption demand. They have been maintaining this positioning for around three years now. The only major shift has been the trimming of exposure in the health care and technology sector,” Srivastava said.

Within the portfolios of the AsiaPacific and emerging market funds, India is currently third, behind China and South Korea, according to Morningstar. India has been holding on to its third spot for a long time and has been closing in on the gap with South Korea.

A surge in the domestic markets, coupled with good net inflows, led the assets of India-focussed offshore funds and ETFs to swell to an all-time high of $57.8 billion during the quarter ended September 2017. The previous all-time high was $55.8 billion, recorded at the end of the third quarter of calendar year 2010.

Most India-focussed offshore funds are actively managed and have an expense ratio of about 2 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.

Despite the lull between June and September, FPIs have invested about $8.3 billion in Indian shares year-todate. Inflows have picked up momentum in November after the government announced a package to revive the economy that includes plans to recapitalise public sector banks and build about 35,000 km of highways.

“India has remained one of the best performing markets this year and sustained reforms will continue to drive long-term money into the country. The move to recapitalise banks and Moody’s recent upgrade has also boosted sentiment,” said Rikesh Parikh, vice-president, institution corporate broking, Motilal Oswal Financial Services.

Last week, Moody’s Investors Services upgraded India’s sovereign ratings from the lowest investment grade by a notch. The upgrade is expected to boost investor sentiment and prop up FPI inflows into equities, albeit marginally. Since the Moody’s upgrade, the Sensex has surged 1.7 per cent, or 573 points.

On Friday, Standard & Poor’s kept India’s sovereign rating unchanged at “BBB-” with a stable outlook. The status quo may have little impact on Indian equities, say experts.

However, there are potential headwinds and tailwinds, which both local and foreign investors will keep an eye out for. “Flows from FPIs in the coming months would be event-specific. Investors would like to see economic growth picking up and any further surge in crude prices or rupee depreciation could check FPI flows into India,” Srivastava said.