What are FII & Domestic Institutional Investors (DII) - Meaning and Importance

Introduction

Institutional investors play an essential role in the makeup of a nation’s stock market. Businesses need capital to fuel growth. Stock markets are engines of growth as they provide the necessary resources to businesses willing to take risks with expansion. There are a variety of institutional investors. Foreign and domestic institutional investors together drive the trading activity in equity and debt market segments.

FIIs - Foreign Institutional Investors 

Until the 1980s, the Indian stock market was majorly driven by traditional market players such as retail investors, partnerships, HUF, companies, societies, and trusts. Also, the nation’s development strategy was concentrated on import substitution, debt inflows, and official development assistance.

However, post liberalisation of the Indian economy in 1991, FIIs have been allowed to invest in Indian stock markets. Securities such as shares, debentures, and warrants issued by Indian companies and schemes issued by the domestic fund houses formed the primary investment medium for FIIs.  India is one of the emerging global economies, offering a higher growth opportunity than many other developing nations, has emerged as an attractive investment destination amongst the foreign institutional investor community over the last couple of decades.

Comprising of hedge funds, mutual funds, insurance companies, and investment banks, FIIs have emerged as the primary source of an international fund to the Indian economy and have helped businesses by providing the required capital. With the steady rise of FII investment in India, they have also emerged as crucial market movers as they generally tend to purchase and sell securities in mammoth quantities.

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DIIs - Domestic institutional investors

Domestic Institutional Investors are institutions like insurance companies, mutual fund houses, pension funds, or provident funds. DIIs generally pool money from the small investors of the country and then trade in different securities and assets of the country. Based on the current economic trend and the political scenario in the country, the DIIs invest in a different class of financial assets and securities, both traded and non-traded. Like the FIIs, over the years, DIIs have also emerged to become an essential source of domestic funds for the companies and play a significant role in the economy’s net investment flow.

Today, both FII and DII have emerged to become critical enablers of the Indian business community and economy as they have been able to provide capital funding to the business houses sustainably. Foreign portfolio investors or FPIs play a vital role in the Indian stock market. They own nearly 18-20% of the value of shares traded on the Bombay Stock Exchange, according to the data on the custody of shares held by the National Securities Depository Ltd or NSDL. (https://www.fpi.nsdl.co.in/web/Reports/ReportDetail.aspx?RepID=91)

Domestic institutional investors like mutual funds own close to 9% of the value of shares traded on the BSE, according to another set of data from the Securities and Exchange Board of India.  (https://www.sebi.gov.in/statistics/mutual-fund/deployment-of-funds-by-all-mutual-funds.html)

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Their presence has made access to capital easy for Indian businesses. Further, FII and DII inflow of capital help in financial innovation and the development of hedging instruments. FII and DII improve capital markets and corporate governance. 

Disclaimer

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