If the FII money is not coming in via the route of India focused offshore funds and ETFs, then the where is the foreign money coming from?

“There are a number of funds which have partial allocation to India in their portfolios. These primarily include emerging market funds, Asia-Ex Japan funds, BRIC funds and other global equity funds.

A large part of the inflows into the Indian stock markets also comes in via the route of such funds having partial allocation to India in their portfolios,” Morningstar said.

In fact, top ten emerging market funds (Virtus, Vanguard, iShares MSCI) accounted for $4.50 billion of FII investment in 2012. But India-focused funds and ETFs had registered a cumulative net outflow of $1.8 billion during the year 2012, compared to a net outflow of $5.4 billion registered during the year 2011.

“The volatility in the rupee, coupled with macroeconomic concerns of a slowdown and ballooning deficit weighed on sentiments, and resulted in outflows for most part of 2012 from the India focused offshore funds,” says a study by US-based research firm Morningstar.

One big contributor of flows into India in 2012 have been emerging market stock funds. These funds have a decent allocation to India in their portfolios, and have registered huge inflows from investors during 2012. Concerns in the US and the Eurozone, higher growth prospects in emerging countries, and quantitative easing around the world has prompted investors to pour money into emerging market funds.

Among emerging market funds, Virtus Emerging Markets Opportunities Fund recorded the highest estimated inflow into Indian stocks during the year 2012 of $786 million, helped by an overall inflow of $3.4 billion into the fund during the year.

This active emerging market fund also saw its India allocation rise from 18.7 per cent at the end of 2011 to 25.7 per cent in September 2012 (on a net basis) as per last available data. Vanguard Emerging Markets Stock Idx Fund recorded an estimated portfolio inflow into Indian stocks during 2012 of around $763 million, helped by an overall inflow of $11.7 billion into the fund during the year.

The fund is a passive emerging market index fund with assets in excess of $75 billion at the end of 2012, of which an estimated $5 billion was invested in Indian stocks. Its net allocation to Indian stocks went up from 5.5 per cent at 2011-end to 7.2 per cent at September-end 2012.

Another emerging market index fund, iShares MSCI Emerging Markets Index Fund also registered an estimated inflow of $679 million into Indian stocks during the year 2012, helped by an overall inflow of $10.5 billion into the fund during the year.