Indian equity rebound lifts offshore fund assets despite continued outflows

India-focused offshore funds and ETFs saw a narrowing but still sizable outflow trend in the June 2026 quarter, even as Indian equities staged a strong recovery and lifted assets under management. Morningstar’s latest Offshore Fund Spy report shows foreign investors remained cautious, but the pace of selling moderated and overall sentiment toward India improved versus the previous quarter.

India-focused offshore funds and ETFs recorded net outflows of $4.7 billion in the quarter ended June 2026, slightly better than the $5.0 billion seen in the March quarter.

The bulk of the withdrawals continued to come from actively managed funds, which saw $4.2 billion in outflows, while India-focused ETFs posted comparatively smaller outflows of $420 million.

Despite that, the asset base of the category rose 4.2% to $80.2 billion from $77.1 billion in the previous quarter, helped by the rebound in Indian equities.

Morningstar said the improvement reflected a more constructive backdrop as domestic fundamentals remained resilient and geopolitical tensions eased.

Strong market rebound lifted performance

The quarter delivered a sharp recovery in Indian markets. The BSE Sensex rose 6.9%, while broader markets outperformed, with the BSE Midcap index up 17.4% and the BSE Smallcap index up 29.2%.

That rally helped India-focused offshore funds and ETFs generate a 10.7% return in the quarter, ahead of the MSCI India USD Index, which returned 10.2%. The category has outperformed the index over the six-month period, but Morningstar noted it still trails over the one-year and three-year horizons.

iShares MSCI India ETF remains the largest vehicle

Among the 10 largest India-focused offshore funds and ETFs, the iShares MSCI India ETF retained its lead with $6.9 billion in assets under management, remaining the biggest India-focused offshore investment product despite continued outflows.

The report suggests that even in a period of net selling, large India vehicles continue to dominate investor attention because of their size, liquidity and benchmark appeal.

Wider global funds still trimming India exposure

Morningstar also tracked Indian allocations inside broader global, emerging-market and Asia-Pacific strategies. Combined Indian equity exposure in these diversified funds stood at about $319 billion in the June quarter, up marginally from $317 billion in March.

The increase was led by global funds and emerging-market funds, while Asia/Asia-Pacific funds saw a sharp decline in India allocation. However, all three categories remained net sellers of Indian equities during the quarter, showing that portfolio rebalancing and caution around valuations continued to outweigh the improving market mood.

Why the report matters

The report is closely watched because it gives a window into how global money managers are positioned on India beyond headline FII numbers.

Offshore funds and ETFs are important conduits for foreign participation in Indian equities, and their flows often signal whether global investors are becoming more constructive or still sitting on the sidelines.

For policymakers and fund houses, the June-quarter data suggest a nuanced picture: India is regaining favour, but not enough to reverse outflows yet. The category’s rising assets and better performance indicate a healthier backdrop, but continued net selling shows that global investors are still selective, especially amid macro uncertainty and valuation concerns.

Outlook

The key takeaway from the report is that sentiment is improving, but capital is not yet fully returning. India’s market recovery has helped shore up offshore fund assets, and the stronger performance of mid-cap and small-cap stocks points to broader domestic confidence.

Still, the continued outflows from offshore funds and the net selling by broader global strategies show that foreign investors remain cautious heading into the next quarter.

If the rally in Indian equities continues and global risk appetite holds up, offshore flows may stabilise further. But for now, Morningstar’s data show a market that is recovering in price faster than it is recovering in foreign conviction.