ETFs hold up better than active funds in India-focused offshore funds' March quarter selloff
The 10 largest India-focused offshore funds and ETFs together saw assets decline 22% to $31 billion. The iShares MSCI India ETF remained the largest offshore India investment vehicle with assets of $6.7 billion, though it also recorded the biggest quarterly outflow at $1.46 billion. The top 10 funds, according to the report, now account for nearly 40% of the total assets in the India-focused offshore fund and ETF category. All the funds witnessed a fall in their assets during the quarter.
Morningstar said market conditions showed some signs of stabilisation in April and early May as geopolitical tensions eased slightly and oil prices moderated. But future fund flows are now expected to remain closely tied to global risk sentiment, crude oil prices, inflation trends and interest-rate expectations.
India-focused offshore equity funds suffered their worst quarter since the pandemic-era market volatility, but exchange-traded funds (ETFs) proved more resilient than actively managed funds as global investors rapidly cut exposure to Indian equities amid rising geopolitical and macroeconomic risks.
According to Morningstar’s Offshore Fund Spy report, India-focused offshore funds and ETFs recorded combined net outflows of $4.97 billion during the January–March 2026 quarter, nearly three times higher than the $1.8 billion in outflows seen in the previous quarter.
Actively managed offshore funds accounted for the bulk of the selling, posting net outflows of $3.46 billion during the quarter — the largest withdrawal since March 2020, when the COVID-19 market crash triggered outflows of $3.58 billion. Offshore ETFs also turned negative, recording outflows of $1.5 billion after attracting inflows of $552 million in the preceding quarter.
Despite the reversal, ETFs held up better than active funds during the selloff, which Morningstar attributed partly to their lower expense ratios, higher liquidity and growing use as tactical allocation tools during volatile periods.
“ETFs provide easy entry and exit options, so they become tactical allocation or parking tools during uncertain periods. That’s why ETF flows have been relatively better compared to actively managed funds,” said Himanshu Srivastava, Associate Director – Manager Research at Morningstar India in conversation with Moneycontrol.
Morningstar attributed the sharp deterioration in investor sentiment to escalating geopolitical tensions in the Middle East involving the United States, Israel and Iran, along with rising crude oil prices, elevated US bond yields and a stronger dollar that reduced the appeal of emerging-market assets.
Foreign institutional investors withdrew nearly $14.2 billion from Indian equities during the quarter as global investors shifted toward safer assets such as US Treasuries and government bonds.
“In such scenarios, foreign investors generally become cautious and move money into safer assets which are offering relatively better yields compared to equities,” Srivastava said.
The report also highlighted concerns around elevated Indian market valuations, particularly in the mid- and small-cap segments, where earnings expectations had started moderating. Morningstar said valuations had become “disconnected from near-term earnings visibility,” triggering profit-booking and a broader market recalibration.
AUMs decline
Total assets under management across India-focused offshore funds and ETFs fell 19.5% quarter-on-quarter to $77 billion at the end of March 2026, down from about $96 billion in December 2025. The decline reflected both investor withdrawals and sharp corrections in Indian equities during the period.
The 10 largest India-focused offshore funds and ETFs together saw assets decline 22% to $31 billion. The iShares MSCI India ETF remained the largest offshore India vehicle with assets of $6.7 billion, though it also recorded the biggest quarterly outflow at $1.46 billion. The top 10 funds, according to the report, now account for nearly 40% of the total assets in the India-focused offshore fund and ETF category. All the funds witnessed a fall in their assets during the quarter.
Indian equities witnessed a broad-based correction during the quarter, with the BSE Sensex falling 15.5%. Against this backdrop, the report noted that the broader category of India-focused offshore funds and ETFs declined 17.6% during the quarter, although it marginally outperformed the MSCI India USD Index, which fell 18.1%. Despite the relative outperformance during the quarter, the category continued to lag the benchmark over both one-year and three-year periods.
Will ETFs become the preferred route?
However, Srivasrava does not expect ETFs to overtake actively managed funds in India anytime soon.
“From an Indian market perspective, I don’t see ETFs overtaking actively managed funds anytime soon,” Srivastava said, adding that actively managed funds still account for a significantly larger share and have generally delivered better returns over longer periods.
Morningstar said market conditions showed some signs of stabilisation in April and early May as geopolitical tensions eased slightly and oil prices moderated. But future fund flows are now expected to remain closely tied to global risk sentiment, crude oil prices, inflation trends and interest-rate expectations.
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