The recent upswing in the stock market appears to have reiterated the underlying optimism prevalent among India-dedicated offshore funds that have registered 60-70% returns over the past one year.

A recent S&P rating report (on offshore funds) reveals that most India-dedicated equity funds have been doing well over the past couple of years. Experts reason that this may well be on account of fact that the market rally has been led by liquid large-cap stocks for the past one year.

Offshore funds specialise in investing in foreign companies or corporations. These funds have non-residential investors (often high net worth investors and institutions) and are regulated by the provisions of foreign countries where they are registered. Most of these funds are launched from tax havens like Mauritius or Cayman Islands. Overseas funds have been active in India, investing in all sectors of the equity market.

“Offshore funds could typically be investing in large-cap stocks as investors are more comfortable investing in large-cap companies with higher liquidity,” said Sai Krishna Tampi, head-PMS, HSBC AMC.

According to S&P data, I-Merge, a dollar-denominated fund, was ranked ‘the best performing fund’ with over 70% returns as on June 28. Franklin India fund clinched the second spot with 69%, while Kotak Indian Mid-cap Fund logged 68% returns to clinch the third spot.

“Long-term investors invest in offshore funds. Foreign investors, over the past 3-4 years, have been very steadfast while investing in Indian equities. Though, they may not be buying when the market is bad, they are not basket-selling their portfolio either,” said Bharat Shah of ASK Investment Managers, which advises three India-dedicated offshore funds — I-Merge, India Value Investments (INVIL) and I-Gain. “The value of Indian market is large and still growing; it is capital-efficient and there is immense opportunity for long term compounding,” Mr Shah added.

While the AUM of the entire mutual fund industry stands at nearly $100 billion, total assets in growth funds, comprising funds that invest in equities with a medium or long-term investment horizon, is nearly $30 billion.

Experts say the AUM of India-dedicated offshore funds is nearly $35 billion. The remaining $70 billion is invested in cash and liquid funds that invest in short-term instruments.

“India equity funds have been doing exceedingly well due to buoyant capital markets and an appreciating rupee. Most offshore funds have returned 10-12% more than the pervious years as a result of rupee appreciation,” said Dhirendra Kumar, CEO, Value Research.

“Though inflows into India, by way of offshore funds, have been going on for some time, it has taken off in a big way recently. As of now, there are around 70 offshore funds (with about 230 variants/plans or themes) investing in India — the biggest being the $6 billion HSBC GIF Indian Equity fund (with about 11 variants/themes),” Mr Kumar added.