What are FII and DII Investments, How do they impact Equity Market

Introduction

Institutional investors in India can be both foreign investors and domestic investors. When India opened its market to foreign investments, they were called Foreign Institutional Investors (FIIs). To streamline the process of foreign investments in India, the government introduced new Foreign Portfolio Investor (FPI) regulations in 2014. The Securities and Exchange Board of India (SEBI) implemented these regulations. In short, FIIs are known as a single foreign investor or a group of foreign investors who bring foreign portfolio investment.

An FPI invests in securities in another country, and can hold up to 10% equity in a company. There are a variety of entities that can register as an FPI. Among them are foreign pension funds and foreign mutual funds, investment trusts, banks, asset management companies, sovereign wealth funds, insurance companies, government, and government-related foreign investors.

Domestic institutional investors (DIIs)are investors who usually pool money to trade in securities in their home country. In India, DIIs are mutual funds, insurance companies, banks and financial institutions, and local pension and provident funds.

Let us now look at how FPIs and DIIs impact the equity markets.

The major trading in the stock market is dominated by institutional investors. However, in the recent past there are some changing trends. In 2021, retail investors dominated the market and had a share of 45%, up by 12% compared to 2016.  But still institutional investors are known as the market makers. That is because they trade in a much larger quantity of securities than an average individual investor. Stock prices can rise and fall depending on their trading activities. Though this impact may be short-term, it affects the market when anyone buys or sells shares in large quantities.The presence of these investors also provides the necessary thrust to the market.

When a foreign investor invests in a market, it shows investor confidence in that market. If more foreign investors invest in India, our economy and our markets will look more attractive for other investors. It also helps in keeping positive cash flows in the capital account and balance any deficit in the current account.

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As institutional investors have the advantage of performing a better due diligence compared to individual investors, a higher institutional stake in any company is considered a positive sign for a stock. But this can’t be the sole criteria for investment; other factors also need to be evaluated before making any investment.

You can check the FII and DII buy/sell data on the NSE website from the following link. This link will give you total buy, sell, and net value in rupee terms. If the net value is positive for a particular segment, they have made a net purchase. If the net value is negative, they have made a net sell.

Additional Read: What are FII and DII

Conclusion

Since they can make the market move as they trade in large quantities, institutional investors are rightly called the “whales of wall street”. As an investor, apart from taking into consideration other factors, you need to look at FIIs and DIIs to understand how the market will move.

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