India-focused offshore funds log $5bn outflows in Q1 2026

What changed for foreign investors in Jan–Mar 2026

India-focused offshore funds and exchange-traded funds (ETFs) saw a sharp reversal in investor flows in the quarter ended March 2026. Morningstar’s Offshore Fund Spy – March 2026 reported combined net outflows of $1.97 billion from India-focused offshore investment vehicles. That was a steep deterioration compared with the $1.8 billion outflow in the previous quarter. Morningstar linked the shift to a more defensive global risk environment and a correction in Indian equities. Investors reduced exposure to emerging markets as volatility increased across currencies, commodities, and bond yields. The quarter also marked one of the weakest periods for India-focused offshore equity strategies since the pandemic-era turbulence.

Morningstar’s flow numbers: active funds hit harder than ETFs

Morningstar’s data showed actively managed offshore mutual funds bore the brunt of the selling. Active India-focused offshore funds recorded net outflows of $1.46 billion in the quarter. Morningstar noted this was the largest withdrawal since March 2020, when the COVID-19 market crash triggered outflows of $1.58 billion. Offshore ETFs also moved into negative territory, logging outflows of $1.5 billion. In the preceding quarter, ETFs had attracted inflows of $1.552 billion. Despite the reversal, ETFs were described as comparatively more resilient during the selloff.

Why ETFs held up better in a risk-off quarter

Morningstar attributed relative ETF resilience to structural features that suit volatile markets. Lower expense ratios and higher liquidity can make ETFs a preferred vehicle for quick allocation changes. Himanshu Srivastava, Principal, Manager Research, Morningstar Investment Research India, said ETFs offer easy entry and exit options and are often used as tactical allocation or “parking” tools during uncertain periods. That dynamic helped ETF flows look better than actively managed funds even as both categories saw outflows. Morningstar also noted that ETF market share increased modestly during the quarter.

Global triggers: West Asia tensions, strong dollar, bond yields

Morningstar pointed to multiple global and domestic factors converging during the quarter. A key driver was geopolitical tension in West Asia involving the US, Israel and Iran. The report also cited a stronger US dollar, rising bond yields, and uncertainty around the trajectory of US Federal Reserve rate cuts. In this environment, investors moved toward safe-haven assets such as US Treasuries and the dollar. That shift reduced allocations to emerging markets, including India. Morningstar said future flow trends are likely to remain heavily influenced by geopolitical developments, crude oil prices, inflation trends, and interest-rate expectations.

Domestic factors: valuations and profit-booking in mid and small caps

Domestic market conditions amplified caution that was already building globally. Morningstar highlighted that Indian equities had rallied strongly over recent years, stretching valuations, especially in mid- and small-cap stocks. As earnings growth expectations moderated, investors engaged in profit-booking. Morningstar said valuations had become “disconnected from near-term earnings visibility,” prompting a recalibration. The quarter ultimately saw a broad market correction, with higher-risk segments facing sharper pressure.

What happened in the market: indices and category performance

Benchmark declines during the quarter were steep. The BSE Sensex fell 15.5% in Jan–Mar 2026. The BSE Midcap Index declined 13.6%, while the BSE Smallcap Index dropped 16.1%, making small caps the worst-hit segment. Morningstar reported the broader category of India-focused offshore funds and ETFs declined 17.6% during the quarter. The category marginally outperformed the MSCI India USD Index, which fell 18.1%. However, Morningstar added that the category continued to lag the benchmark over one-year and three-year periods.

Foreign selling intensified: FII outflows and declining holdings

The selloff was also visible in broader foreign investment trends during the quarter. Foreign Institutional Investors (FIIs) remained net sellers and pulled nearly $14.2 billion out of Indian equities. Total FII assets in Indian equities fell nearly 20%, declining from $126 billion in December 2025 to $160 billion by March 2026. FII ownership in India’s total market capitalization also slipped during the period. Separately, the text cited that in March 2026, FPI ownership had fallen to 16.13%, described as a 14-year low, while domestic institutional ownership climbed to 19.24%, described as a record high.

AUM impact: offshore India products shrank sharply

Asset declines were driven by both market corrections and withdrawals. Morningstar said assets under management (AUM) of offshore India-focused funds and ETFs fell 19.5% quarter-on-quarter to $17 billion at the end of March 2026. The previous quarter’s AUM was stated as $15.7 billion, also referenced as about $16 billion. Morningstar added that the 10 largest India-focused offshore funds and ETFs together saw assets decline 22% to $11 billion. The report noted that all the funds in this set witnessed a fall in their assets during the quarter.

Key figures snapshot

What Morningstar is watching next

Morningstar said market conditions showed some signs of stabilisation in April and early May as geopolitical tensions eased slightly and oil prices moderated. Even so, it cautioned that fund flows remain closely tied to global risk sentiment. The report explicitly flagged crude oil prices, inflation trends, and interest-rate expectations as key variables that could keep investor sentiment highly sensitive in coming quarters. For India-focused offshore products, the quarter underscored how quickly global macro conditions can overwhelm domestic narratives. Whether flows stabilise will depend on how these global inputs evolve, rather than on a single local trigger.