ETFs Outperform Active Funds in India-Focused Offshore Funds' March Quarter Decline

India-Focused Offshore Equity Funds Suffer Worst Quarter Since Pandemic-Era Market Volatility

India-focused offshore equity funds experienced their worst quarter since the pandemic-era market volatility, with exchange-traded funds (ETFs) proving more resilient than actively managed funds. Global investors rapidly cut exposure to Indian equities amid rising geopolitical and macroeconomic risks.

According to Morningstar's Offshore Fund Spy report, India-focused offshore funds and ETFs recorded combined net outflows of $4.97 billion during the January–March 2026 quarter, nearly three times higher than the $1.8 billion in outflows seen in the previous quarter.

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Actively managed offshore funds accounted for the bulk of the selling, posting net outflows of $3.46 billion during the quarter — the largest withdrawal since March 2020, when the COVID-19 market crash triggered outflows of $3.58 billion. Offshore ETFs also turned negative, recording outflows of $1.5 billion after attracting inflows of $552 million in the preceding quarter.

Despite the reversal, ETFs held up better than active funds during the selloff, which Morningstar attributed partly to their lower expense ratios, higher liquidity, and growing use as tactical allocation tools during volatile periods.

Morningstar attributed the sharp deterioration in investor sentiment to escalating geopolitical tensions in the Middle East involving the United States, Israel, and Iran, along with rising crude oil prices, elevated US bond yields, and a stronger dollar that reduced the appeal of emerging-market assets.

Foreign institutional investors withdrew nearly $14.2 billion from Indian equities during the quarter as global investors shifted toward safer assets such as US Treasuries and government bonds.

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The report also highlighted concerns around elevated Indian market valuations, particularly in the mid- and small-cap segments, where earnings expectations had started moderating. Morningstar said valuations had become "disconnected from near-term earnings visibility," triggering profit-booking and a broader market recalibration.

Total assets under management across India-focused offshore funds and ETFs fell 19.5% quarter-on-quarter to $77 billion at the end of March 2026, down from about $96 billion in December 2025. The decline reflected both investor withdrawals and sharp corrections in Indian equities during the period.

Indian equities witnessed a broad-based correction during the quarter, with the BSE Sensex falling 15.5%. Against this backdrop, the report noted that the broader category of India-focused offshore funds and ETFs declined 17.6% during the quarter, although it marginally outperformed the MSCI India USD Index, which fell 18.1%. Despite the relative outperformance during the quarter, the category continued to lag the benchmark over both one-year and three-year periods.

However, Himanshu Srivastava, Associate Director – Manager Research at Morningstar India, does not expect ETFs to overtake actively managed funds in India anytime soon.

Morningstar said market conditions showed some signs of stabilisation in April and early May as geopolitical tensions eased slightly and oil prices moderated. However, future fund flows are now expected to remain closely tied to global risk sentiment, crude oil prices, inflation trends, and interest-rate expectations.