Discover how passive flows are shaping the landscape of foreign capital inflows and what this means for global economies.
Passive investing is becoming increasingly popular in India as well. Just as in the US, where nearly 37.8% of stocks are owned by passive investors who invest in exchange traded funds that track benchmark indices, India is also heading towards this trend. Recent analysis of foreign capital flows reveals that passive investors currently make up 3.8% ($140 bn) of India’s total market capitalisation as of August. This type of ownership has shown resilience and a steady increase over the years in India. In fact, in August 2021 it was at 3% ($102bn), and 3.4% (or $117bn) in 2022.
The stability and longevity of passive fund flow makes it a crucial aspect. According to IIFL Securities, India has consistently received net inflows from foreign passive money over the years, which accounts for about 42% ($6bn) of the total FII inflows in the secondary markets in 2023. Similarly, domestic passive foreign capital inflows have also been robust over time, with $6.8bn inflows in 2023 representing 31% of the overall equity MF inflows.
The primary reason behind this increase is that the number of funds allocating funds to India has increased and so has India’s weightage on these funds. Morgan Stanley, Nomura, and Goldman Sachs have upgraded India to overweight in the last few weeks. The biggest shareholder of FII ETFs in India is Blackrock, which has almost 48% of the AUM. According to IIFL, almost 25% of Blackrock’s total AUM in India comes from its India-specific ETFs.
According to IIFL Securities’ analysis, the combined assets under management (AUM) of passive equity – including both foreign institutional investors (FIIs) and domestic mutual funds (MFs) – have increased by 20%, reaching $140bn in the past year. This accounts for 3.8% of India’s total market capitalization. The AUM for FII passive ETFs has risen by 22%, while domestic passive equity AUM has grown by 17%. Despite the current market conditions, passive inflows continue to be strong for foreign and domestic MFs, making up 42% and 31% of their total equity inflows respectively in CY23. The rise in assets and launch of new schemes further demonstrate the growing popularity and appeal of passive investing in India.
There is now a 12.1% share of foreign ETFs in overall FII equity ownership in India (up from 10.6% a year ago), as India’s relative attractiveness to global funds has improved.
Meanwhile, domestic passive equity assets under management (AUM) increased by 17% to $62bn in the past year. Active mid and small cap schemes have gained share in the last year, according to IIFL Securities. The domestic passive equity AUM is currently 17.1%, down from 17.6% a year ago. Large cap passive equity accounts for 83% of the domestic passive equity assets, as most of the funds are tracked by the Nifty 50 and Sensex index.