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Written by: Staff

TOKYO, July 7 (Reuters) The Bombay market's recent sell-off led many foreign funds to flee to less volatile markets, draining India of more than $1.6 billion in May, but Japanese small investors grabbed shares as others ran for the door.

Although Japan-based mutual funds showed a slight net outflow the following month, according to data from the Reuters fund research unit Lipper, a large number of individual Japanese investors see the market correction as a chance to offset languishing investments at home.

''I think it's a good way to leave assets to our children. The value in yen assets, including property, do not look necessarily attractive over a long run,'' said Ryohei Konaka, a business man in his 30s who recently attended an India fund seminar.

He said he was interested in investing in an India equity fund, putting in 100,000 yen (about $870) per month for a decade or two.

Other foreign investors are also regaining confidence in India, with total foreign buying of a net $87.5 million of Indian shares in June, according to data by the Securities and Exchange Board of India.

A Reuters survey of small investors in Japan showed last week that 27 percent were interested in putting fresh money into equity funds, compared with a combined 12 percent for real estate investment trusts and other real estate products.

Of those who selected equity funds, 36 percent said they would buy India funds. That was down from 43 percent in May, but India still ranked the second-most-favoured region after Japan at 54 percent.

GROWTH IN INDIA India's fast-growing economy has been a magnet for money from Japan, which has been struggling for more than a decade.

While Japan's aging society is a potential threat to its future economic growth, India is benefiting from a rise in its working age population, which aids economic growth.

India's projected economic growth of 7.5 to 8 percent for the year to March is slower than the 8.4 percent in the past year, but that is still in sharp contrast with the official estimate for Japan's economic growth of about 2 percent.

Moreover, a fast-growing middle class in India will likely fuel higher demand for value-added products.

''Despite a steep market fall recently, early birds in this category of investment have been enjoying brisk returns, and the growth potential of India looks very lucrative,'' said Norihiro Fujito, general manager at Mitsubishi UFJ Securities' investment research and information division.

India's top-30 BSE index tumbled almost 30 percent in a month from its May 11 peak before recovering some ground. The index is still twice the level it was at when Japan's first India fund was launched in September 2004.

Foreign cash worth $10.7 billion, 40 percent of which was estimated by Lipper to be from Japanese individuals investing through mutual funds, was a major factor in powering last year's 42 percent gain.

Nobuyuki Fujiwara, market analyst at Lipper, said India funds have gained popularity despite high front-end sales charges of up to 3.675 percent. In Japan, returns on bank deposits are almost zero and those for 10-year government bonds less than 2 percent.

''The concept of holding India funds for a long time is now being widely accepted,'' Fujiwara said.

At its launch last week, Fidelity Investment Japan Ltd.'s fund focusing on firms with profit growth in Asia, including Japan, China and India, had lured 45.9 billion yen ($398.8 million) in assets.

It was the largest amount of initial assets collected for any Japan-based trusts investing in emerging markets since April.

The Fidelity Japan Asia Growth Fund invests in a select group of companies based in the same region covered by MSCI AC Asia Pacific Index -- 14 countries that also include Australia and New Zealand.

Lipper data also showed a new India trust was launched with 31.6 billion yen in assets on May 31, offsetting a net outflow from existing India trusts in the month of 22.8 billion yen.

($1=115.10 Yen) REUTERS SBA RN1150

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