Why did India focused offshore funds lose nearly $5 bn in Q1 2026?

India-focused offshore funds and ETFs witnessed nearly $5 billion in outflows during the quarter ended March 2026, as global investors turned increasingly cautious on Indian equities amid geopolitical tensions, elevated valuations, and rising uncertainty across financial markets. According to Morningstar’s Offshore Fund Spy – March 2026 report, India-focused offshore investment vehicles recorded $4.97 billion in net outflows, marking a sharp deterioration from the $1.8 billion outflows seen in the previous quarter.

The outflows reflect a broader shift in foreign investor sentiment toward India and emerging markets. Morningstar noted that multiple global and domestic factors converged during the quarter, triggering a sharp correction in equities and leading investors to reduce risk exposure.

One of the biggest drivers behind the withdrawal was the global risk environment. Geopolitical tensions in West Asia involving the US, Israel and Iran, coupled with a stronger US dollar, rising bond yields and uncertainty around the trajectory of US Federal Reserve rate cuts, weighed heavily on investor confidence. Investors increasingly moved toward safe-haven assets such as US Treasuries and the dollar, reducing allocations to emerging markets, including India.

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Foreign Institutional Investors

The impact was also visible in broader foreign investment trends. Foreign Institutional Investors (FIIs) remained net sellers throughout the quarter and pulled nearly $14.2 billion out of Indian equities. The sustained selling pressure led to a substantial decline in foreign holdings. Total FII assets in Indian equities fell nearly 20%, declining from $826 billion in December 2025 to $660 billion by March 2026. FII ownership in India’s total market capitalization also slipped during the period.

Domestic market conditions further amplified investor caution. Indian equities had experienced a strong rally over recent years, leading to stretched valuations, especially in mid- and small-cap stocks. As earnings growth expectations moderated, investors increasingly engaged in profit-booking, leading to a broad market correction.

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Q1 2026

The weakness was reflected across benchmark indices. During the quarter, the BSE Sensex declined 15.5%, while the BSE Midcap Index fell 13.6%. Small caps emerged as the worst-hit segment, with the BSE Smallcap Index plunging 16.1%, highlighting the pressure on higher-risk segments of the market.

The correction significantly affected the asset base of India-focused offshore investment products. Assets under management of offshore India-focused funds and ETFs fell 19.5% to USD 77 billion, compared with USD 95.7 billion in the previous quarter.

Within the category, actively managed offshore mutual funds witnessed heavier damage, recording USD 3.46 billion in outflows. India-focused ETFs proved comparatively resilient, with outflows of USD 1.5 billion, as lower costs and greater flexibility continued to attract tactical investors. ETF market share also increased modestly during the period.

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Franklin FTSE India UCITS ETF

Among individual products, Franklin FTSE India UCITS ETF emerged as the largest inflow recipient, attracting approximately USD 270 million. Meanwhile, iShares MSCI India ETF retained its position as the largest India-focused offshore vehicle with USD 6.7 billion in assets, despite witnessing one of the sharpest declines in asset value.

Morningstar said future flow trends into India are likely to remain heavily influenced by global geopolitical developments, crude oil prices, inflation trends and interest-rate expectations, making investor sentiment toward Indian equities highly sensitive in the coming quarters.