How FII and DII play an integral role in the performance of our Indian Stock Market

How FII and DII play an integral role in the performance of our Indian Stock Market

Domestic Institutional Investors are that class of investors who invest in the country that they reside in, here in particular India. Any large financial institution ranging from banks, insurance companies, mutual fund houses. Now many people open an account in banks, buy an insurance policy from insurance companies, now what do these large companies do with these funds? Simply stated, they use these pooled funds to trade in securities listed in the stock exchanges.

Examples of DII- LIC the largest DII in India, Nippon AMC, HDFC Life, Domestic Pension Funds, and leading banking and financial institutions.

Foreign Institutional Investors are those who invest in the geographic location other than that of their country where they reside. Here implying all big companies that are not of India but invest in India. Investment banks, mutual funds etc. SEBI has over 1450 foreign institutional investors registered with it. They are considered as both a trigger and catalyst for the market performance.

How do they affect the performance of Indian Markets?

It is often said that, if you are a long-term investor, it is always advised to track the behavior of the DII’s and if you are a positional trader track the behavior of the FII’s. This indeed is true because domestic institutions know the ground reality, of how things are in the country, but FII’s might not have enough knowledge about the same. Let me give you an example to prove the point,

During the outbreak of the COVID-19 pandemic, our bench mark indices NIFTY50 and SENSEX made lows of 7500 and 25600, respectively. At this juncture when there was panic selling DII’s were supporting the market by continuously buying. Nevertheless, we couldn’t stop the fall as past data suggests that FII’s are the ones that drive the Indian markets.

Net selling by FII= Rs.78500 crores

Net buying by DII= Rs. 72528 crores.

This perfectly proves the point that stay in course with the DII’s for long term, as we all know how the markets brilliantly recovered from these lows to Nifty50 making a high of 18600 and SENSEX- 62240.

Not denying the fact that FII’s have been a constant source of funds for the companies and have played a significant part in providing volumes in the stock exchange, but one small negative news and they start selling in panic.

Companies in which FII’s hold major stake as of quarter ended September 2021:

· HDFC Ltd. - 71.95%

· Shriram Transport Finance- 53.67%

· ZEE Entertainment- 57.18%

· Apollo Hospitals- 51.54%

· Axis Bank- 51.38%

· IndusInd Bank- 51.44%

· ICICI Bank- 47.31%

Companies in which DII’s hold a high stake as of quarter ended September 2021:

· Reliance Industries- 13.20%

· ICICI Bank- 42.49%

· Infosys- 15.66%

· HDFC Bank- 22.53%

· ITC Ltd.- 43.72%

Let us take the most recent example:

On 19 October 2021 the nifty index hit a high of 18604, and on 29 October 2021 it fell down to 17613. A decline of 5.3%. In this minor correction, which is very normal in a healthy bull market, the FII’s again sold.

Now coming on to the aspect of why FII’s actively sell and buy immediately is that they actively trade in the F&O segment, unlike DII’s that majorly are focused in the cash market.

F&O positions have become lead indicators in the short term, because the long and short positions in the F&O segment only determine how the index will perform in the short term, whereas fundamental and macroeconomic factors play a crucial role for long term analysis. A trader has to see when the FII’s are long with a huge position as even one small negative news flow can lead to unwinding of these positions. This unwinding also can bring a huge impact in the cash market. One of the key reasons for a increasing interest in the F&O segment for the FII’s are the higher returns. With this sensitive buying and selling behavior of FII’s, it would make it very volatile for the cash market, which is not healthy for the retail investors.

Now, the reason why DII’s don’t participate in F&O is simply because they are not allowed to by law. Mutual funds and PMS are not allowed to short any stocks or take any leveraged positions in the F&O market, shorting can only be done for hedging and not for directional trading.

Stock markets are primarily driven by institutional money. FII’s and DII’s account for the bulk of the liquidity in the market. The broader trends can be tracked looking at their movement. Past statistics suggest that FII’s have had a greater influence in the market, but the recent sustained inflows from DII’s and the retail is what is driving the markets for consecutive higher highs/tops.

Past example showing how FII’s have had a greater influence:

Now one must be wondering, why did the DII’s aggressively sell during this period, one of the reasons being the elections period. The Modi government was sworn into power on 26 May 2014, and it was a confusion state where the market participants and DII’s didn’t know how the markets would react if the Modi government would come into power or any other party.

The period starting after this, from October 2014 till February 2015 it was making the final tops, From March 2015 till February 2016, the Nifty50 Index has been continuously underperforming, continuously making series of lower tops/highs and lower bottoms, at this period DII’s continuously kept buying in order to support the market. DII’s are the perfect plain vanilla definition of “Buy Fear, Sell Greed”.

The above clearly defines and shows how the DII’s and FII’s play a crucial role in the growth and development of the Indian Stock Market and overall growth of the economy as a whole.