The category saw net outflows of nearly $5 billion during the quarter ended March 2026, sharply higher than the $1.8 billion outflow recorded in the previous quarter.
India-focused offshore mutual funds alone recorded net outflows of $3.46 billion during the quarter — the highest quarterly outflow since March 2020, when such funds had seen withdrawals of $3.58 billion. India-focused offshore ETFs also saw net outflows of $1.5 billion during the period after witnessing inflows in the preceding quarter.
The sustained selling and sharp correction in Indian equities also led to a steep decline in offshore fund assets.
Assets under management of India-focused offshore funds and ETFs fell nearly 20% quarter-on-quarter to $77 billion at the end of March 2026 from about $96 billion in the December 2025 quarter.
The report attributed the outflows to a mix of global and domestic factors, including geopolitical tensions in the West Asia, elevated US bond yields, a stronger dollar, rising crude oil prices and concerns over expensive valuations in Indian equities.
Foreign institutional investors (FIIs) remained net sellers in Indian equities during the quarter, with cumulative net outflows of nearly $14.2 billion.
Morningstar said valuations, particularly in the mid- and small-cap segments, had become disconnected from near-term earnings visibility, prompting profit booking after the strong rally seen in recent years.
Indian equity markets witnessed a broad-based correction during the quarter. The BSE Sensex declined 15.5%, while the BSE Smallcap index fell 16.1%, making it the worst-hit segment.
Among offshore investment vehicles, the iShares MSCI India ETF remained the largest India-focused offshore fund with assets of $6.7 billion, though it also witnessed one of the sharpest declines in assets during the quarter.
Despite the sharp foreign outflows, Morningstar noted that domestic institutional investors and retail participation remained resilient and helped cushion the fall in Indian markets.
The report said future flows into Indian equities are likely to remain dependent on global developments such as geopolitical conditions, crude oil prices, global interest-rate expectations and overall investor appetite toward emerging markets.
