FII stands for Foreign Institutional Investor, and when there is an increase in FII, it means that the world‘s largest investors are investing in the market. This surge often signifies the population’s positive attitude towards its economic growth and the future. It is not only quantitative changes which can be seen on such a chart but also qualitative changes in the sentiment of movements that have the potential to influence the market.
For instance, FIIs invested ₹ 9,800 crore in November and ₹ 50,000 crore in December of the year 2023. The result? The market rose from 18,838 to as high as 21,835 within a period of two months. Quite the jump, right? The first kind of momentum can really get the investors all fired up, which causes more funds to be attracted and more stock prices to go up.
But here’s where it gets interesting. FII inflows are not just a mechanism to spruce up the market numbers but they ensure that liquidity is boosted and that prevents volatility. During 2023, FIIs invested a mammoth ₹145,852 crore in Indian markets, which especially include financial services and capital goods. This sort of cash flow can really boost some industries, so it is not about the overall market cycles but what that money is funding. If you’re considering following the FII flow, then such sectors could be the opportunities.
But let’s not get carried away and start copying the FIIs before getting a closer look at things. What you find with the FII is that most of them are traders and they opt for short-term opportunities. Although they may modify their strategies from time to time, what is good for them in the short run may not be good for you in the long run.
Do not forget that in 2021-2022 FIIs were actually net sellers, the market fell down by 18%. As such, even though their money is propping up the market now, they could withdraw just as quickly when the fundamentals change – a situation that could create more fluctuations.
With regard to volatility, do not forget that FII strategies respond very sensitively to market conditions of the world economy. Just consider such things as interest rates in the United States or shifts in global trade patterns. Therefore, FIIs are inflowing to India today does not mean things will remain the same tomorrow.
That is why it is necessary to pay attention to macro level while considering domestic factors such as the presence of Domestic Institutional Investors (DIIs). FIIs can act as a buyer or seller of the market, whereas DIIs can be stabilizers in times of high fluctuations. They tend to offset the volatility arising from sharp up or down movements in FII funds.
It is also a good point to consider that not all industries receive similar amounts of investments from FII. FIIs, for instance, may be going large on sectors like capital goods but you can easily discover other sectors as being far behind. For instance, in 2023, BSE Capital Goods index was up by 60% and the Sensex by only 16%. Thus, if I follow the FII trail, then I have to find out which sector looks good for investment and where the real money is.
Most importantly, FII inflows are sensitive to the changes in government policy. For example, any fluctuations in foreign investment policies would definitely alter the inflow or outflow of money in the market place. This is the reason why you should always be aware and make your investment decisions accordingly.