India-focused offshore funds and ETFs witnessed net outflows of nearly $5 billion during the quarter ended March 2026, marking the sharpest quarterly pullback since the pandemic-led selloff in 2020, according to a report by Morningstar.
India-focused offshore funds and ETFs together recorded net outflows of $4.97 billion during the March quarter, sharply higher than the $1.8 billion outflow seen in the December 2025 quarter. Of the total outflows, India-focused offshore funds accounted for $3.46 billion, while offshore ETFs saw outflows of around $1.5 billion.
FII selling
Foreign institutional investors (FIIs) remained net sellers in Indian equities during the March quarter, with cumulative net outflows of nearly $14.2 billion. This was due to heightened global uncertainty, geopolitical tensions, rising risk aversion among foreign investors, and profit booking amid elevated valuations in Indian equities.
The BSE Sensex declined 15.5 per cent during the quarter, while the Nifty 50 index dropped 14.54 per cent amid a broad-based correction in equities. India-focused offshore funds and ETFs as a category delivered negative returns of 17.6 per cent during the quarter, although they marginally outperformed the MSCI India USD Index, which declined 18.1 per cent.
The quarter witnessed geopolitical tensions in West Asia involving the US, Israel and Iran, alongside a stronger dollar, elevated US bond yields and surging crude oil prices, all of which hurt risk appetite for emerging markets such as India.
“Valuations became disconnected from near-term earnings visibility, leading to a recalibration in market expectations,” the report said.
Market conditions started improving in April and early May following the announcement of a ceasefire in West Asia, which eased crude oil prices and improved global risk appetite. However, Morningstar said investor sentiment remains sensitive to geopolitical developments, commodity prices and global monetary policy signals.
AUM decline
The sharp correction in Indian equities also eroded the asset base of offshore India-focused products. Assets under management of India-focused offshore funds and ETFs fell 19.5 per cent quarter-on-quarter to $77 billion at the end of March 2026 from about $96 billion in the previous quarter.
Within this, offshore ETFs accounted for $24.1 billion while offshore funds held $52.9 billion in assets.
Morningstar said offshore ETFs continued to display greater resilience than actively managed offshore funds. “ETFs also offer easier exit options and greater cost efficiency than funds,” the report said, adding that foreign investors increasingly use ETFs as a “flexible means to quickly move in and out of India’s equity markets.”
Among individual products, the Ireland-domiciled Franklin FTSE India UCITS ETF attracted the highest net inflows of around $270 million during the quarter, followed by iShares MSCI India ETF USD Acc and UBS MSCI India SF ETF USD Acc.
On the other hand, iShares MSCI India ETF saw the steepest outflows at $1.46 billion during the quarter.