Passive flows account for 42% of foreign capital flows in 2023

• Passive flows from foreign institutions account for roughly 42% ($6bn) of net FII inflows in the secondary markets in India so far in calendar year 2023.
• Blackrock is the largest foreign investor in India and 25% of its total assets under management in India come from its India dedicated exchange traded funds.
• Passive investors accounted for 3.8% ($140 bn) of India’s total market capitalisation.
  

Passive investing is coming of age in India too. Like 37.8% of US stocks are owned by passive investors – investors that put money in exchange traded funds that merely track benchmark indices – India too is moving in that direction. Analysis of capital flows shows that passive investors accounted for 3.8% ($140 bn) of India’s total market capitalisation at the end of August. Passive ownership has remained resilient over the years in India and has been steadily rising. In August 2021, the same was 3% ($102bn) and 3.4% (or $117bn) in 2022.

Passive fund flow is important as it is not considered to be hot money and, therefore, more stable and sticky. Foreign passive money has consistently seen net inflows in India over the years, and has contributed to roughly 42% ($6bn) of net FII inflows in the secondary markets in India so far in calendar year 2023, says IIFL Securities. Domestic passive inflows have also remained strong through the years. With $6.8bn inflows in 2023 so far, domestic passive funds represent 31% of the total equity MF inflows.

The primary reason behind this increase is that the number of funds allocating funds to India has increased and so also has India’s weightage on these funds. In the last few weeks, Morgan Stanley, Nomura and Goldman Sachs have upgraded India to overweight. Blackrock leads the way and holds almost 48% of the FII ETF AUM in India. Of Blackrock’s total AUM in India, almost 25% comes from its India dedicated ETFs, says IIFL.

Analysis done by IIFL Securities shows that total passive equity AUM – both FIIs and domestic MFs – has risen 20% to $140bn in the last year and it constitutes 3.8% of total India market cap. Within that, FII passive ETF AUM is up by 22% while domestic passive equity AUM is up 17%. Passive inflows for foreign/domestic MFs have remained resilient over the years and constitute 42%/31% of their total equity inflows so far in CY23. New schemes launches, steady increase in assets and money coming into passive schemes highlights the growing attractiveness and popularity of passive investing in India.

Share of foreign ETFs to overall FII Equity ownership in India is now 12.1% (up from 10.6% a year ago). Over this period, India weightage of most foreign ETFs has also gone up, as India’s relative attractiveness to global funds keeps on improving.

On the other hand, domestic passive equity assets under management (AUM) is up 17% to $62bn in the last year. Domestic passive equity AUM is now 17.1% of the domestic equity mutual funds AUM, down from 17.6% a year ago. According to IIFL Securities, active mid and small cap schemes have gained share in the last year. Large cap passive equity schemes contribute to 83% of the domestic passive equity AUM, as schemes tracking Nifty 50 and Sensex make up a majority of the AUM.