Decoding Foreign Institutional Investors (FIIs) and Their Importance In Indian Stock Markets

What a great start to the new year-2022 with fresh Foreign Institutional Investors inflows pushing the Indian stock market higher. Yes! On the first two days of trading in the New Year, the Nifty 50 and Sensex ended in bullish with FIIs inflows of Rs.902.64 crores.

However, Last year the FIIs withdrew their money from Indian Stocks Markets, especially in the last months.

But being a trader in the stock market, have you ever wondered why we give so much importance to FII DII activity. 

Don’t Worry! In today’s blog, we will discuss how FII in the stock market plays an important role: 

Understanding FIIs

Foreign Institutional Investors can include hedge or pension funds, insurance companies, investment banks, and mutual funds. 

They can be a good source of capital in developing economies. Yet, many developing nations, such as India, have set limits on the total value of assets that FII can buy and the number of equity shares they can buy, particularly in a single company.

The main reason for setting a limit is that it helps to limit their influence on individual companies, the nation’s financial markets, and the potential damage that might occur if they fled during a crisis.

Also, all FIIs in India should be registered with the Securities and Exchange Board of India (SEBI) for participating in the market.

Why should we analyze FII activity?

The extent to which FIIs influence stock market movement is debatable, but their research power decides the stock market’s direction. As they buy and sell stocks in bulk based on their research, buying/selling on their part may result in a sharp rise/fall in prices.

So, if we look at the historical data, whenever they have withdrawn money, the stock market has fallen and vice versa. However, the impact is more prominent and direct when they pull out their funds as it makes indices fall, breaking all supports. We can interpret this by comparing their activity data and the Sensex/Nifty levels as shown below:

So, a retail investor can follow them like where they are investing, which stocks they are buying or selling, etc. Thus, this will help the retail investors earn a decent amount of money without any research or spending time finding a good quality stock. 

As individuals, we know it isn’t easy to find out the important information of a company while researching a stock. Thus, in the research part, we can rely on them to a certain extent.

When FII invest in some companies, it is a good hint for us that the stock might also perform in the future, and we can invest in such a company. Thus, their money inflow works as a good indicator.

Similarly, we can do the same when they exit from a stock. If we are holding that stock and taking their money out, we can decipher that it’s time to book profit in that stock.

FII Shareholding Pattern in Indian Companies

When researching which companies to invest in, investors should also check the FII holding in that particular company. If they are increasing their stake in a particular company then it is a good sign as it shows that they are confident through their research that the company will grow.

Similarly, if they are decreasing their stake in any company then it is a bad sign as it shows that the company is not growing is the same speed as they had expected and withdrawing funds from that company.

From the image below we can see the FII/FPI shareholding in Reliance Industries Ltd. Similarly, we can check the shareholding pattern of any company listed on the stock exchange with help of StockEdge:

Difference between FIIs and DIIs

The main difference between them is where the entity is headquartered. For example, there are four sets of domestic institutional investors in India: Indian mutual funds, local pension schemes, Indian insurance companies, and banks or financial institutions.

Similarly, FIIs for India include hedge funds, pension funds, international insurance companies, and mutual funds based outside India.

Analyzing their activity using StockEdge:

You can easily track daily/weekly/monthly data from StockEdge as shown below:

Bottom line

Thus, we can conclude that it’s essential to track the FII and DII activity to analyze the overall movement of the stock market. We hope you found this blog informative and use it to its maximum potential in the practical world. Also, show some love by sharing this blog with your family and friends and helping us in our mission of spreading financial literacy.

Happy Investing!