FIIs and DIIs investment trading. Who is dominating the market?

How FIIs and DIIs are the market makers. 

Economic growth and development are indicators of progress and wealth provided by financial investment. Along with the reserves, exports, government revenue, financial position, and available supply of domestic savings, foreign investment is also necessary for a country’s well-being.

The Foreign Institutional Investors (FIIs) and the Domestic Institutional Investors (DIIs) have recently emerged as essential players in the Indian stock market. They are gradually becoming one of the significant factors contributing to the growth of the financial markets. 

Who are FIIs? 

Domestic Institutional Investors (DIIs) are those institutional investors who invest in securities and other financial assets of the country where they are located. Investments made by institutions are referred to as an institutional investment. For example, investments by institutions or organizations such as banks, insurance companies, mutual fund houses, etc.

Foreign Institutional Investors started investing in the Indian stock market only in 1992. FIIs were allowed to invest in securities in listed corporations, likewise as within the secondary market. FIIs can invest in the Indian capital markets only through the country’s portfolio investment scheme. 

What are DIIs? 

Domestic Institutional Investors (DIIs) are those institutional investors who invest in securities and other financial assets of the country they are based in. Institutional investment is defined as investments by institutions or organizations such as banks, insurance companies, mutual fund houses, etc.

Importance of FII and DII 

DIIs and FIIs account for the liquidity of the stock market. Tracking the institutional investment outflow and inflow helps forecast the market trends. Moreover, FIIs have a significant impact on domestic market trends.  

FIIs investments in the Indian stock markets reflects their high confidence and positive market sentiments. The FII investments have mixed impacts on the market overall. On the one hand, they increase the scope of the market, whereas, on the other hand, they increase the size of speculation. 

Impact of FIIs on Stock Market

Institutional investors are known as market makers, as they trade in a larger quantity of securities than an average individual investor. Stock markets rise and fall depending on their investing activities. A massive inflow of FIIs has continually increased the Indian capital market index and vice versa. 

Impact of FIIs and DIIs
FII and DII movement

Source: EduFund Research team.

Net Purchase/Sales of FII and DII from 1st Jan 2021 to 1st Mar 2022

AIIS and DIIS Sensex Movement

Sensex Movement from Jan 2021 to Mar 2022.

Source: EduFund Research team

The above graphs show the direct impact of FII and DII movement on the BSE Sensex Index. In January 2021, a major FII purchase caused a significant rise in the Indian Stock market.

Net Sales of FIIs in February 2022 had a slight negative impact on Sensex. But DII ownership of Indian equities rising quickly with consistent and rising SIP investments has stabilized the market conditions.

Since October 2021, the Indian stock market has seen a more significant FII exit and a heavy inflow from DII. Due to the recent uncertainties in the market conditions, a large DII exit caused a significant negative impact on Sensex, among other global factors.

It is important to note that there is a positive correlation between DIIs movement and the Sensex index. This correlation between the movement of the DIIs movement and Sensex shows that the market moves with the DIIs investments. 

As an investor, apart from considering other factors, one should analyze the FIIs and DIIs movement to understand how the market will move. Generally, retail investors suffer the most in-stock market correction situations. DII’s & FII’s are basically market makers. A majority of the market movements depend on their investment behaviour and buying-selling pattern.

From a long-term perspective, one should look at the FIIs selling points as an investment opportunity due to heavy market corrections. Moreover, with an increase in the Domestic institutional investments, there is a decrease in the volatility caused by FII movements.

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