What does FII mean?
FII is short for Foreign Institutional Investor. An institutional investor is a company that invests in other companies. These companies could be hedge funds, mutual funds, insurance companies, banks, corporates or pension funds. A foreign institutional investor is such a company that is registered outside India but invests in the Indian stock markets.
Why do foreign institutional investors invest in India?
Foreign institutional investors typically look to invest in developing economies. Developing economies have high growth prospects, which is what FIIs look for. For an FII, investing in a developing economy is akin to how we buy growth stocks. When we do that, we look at stocks that are on expected to go further up on the growth trajectory. This is how FIIs look at a developing country like India.
India is one of the fastest growing countries in the world. According to the World Bank, India is a stable and resilient economy that is poised for strong growth. The country’s average growth rate over the past 3 decades has on the relatively higher side, even after disruptions caused by demonetisation and GST implementation. The World Bank expects India’s GDP to grow by 7.3% in FY19 and 7.5% in FY20.
India is also expected to become the world’s third-largest consumer market by 2030. This means that the disposable income is on the rise and Indians are expected to spend more on goods and services. Higher spending adds to the country’s GDP and bodes well for businesses within the economy.
These are some of the things that make India an attractive investment destination for FIIs. They invest in Indian companies to partake in the country’s larger growth story.
How do foreign institutional investors invest in India?
FIIs invest in Indian companies the same way we do--by buying stocks of companies from the stock exchanges. The difference would be that their position would be in huge amounts.
To understand this with an example, let’s say there is a hedge fund in the US that believes that the Indian IT sector makes a strong investment case. The hedge fund then filters companies within the sector and decide on a couple of names to invest in. The hedge fund would then buy stocks of those companies from Indian stock exchanges like BSE and NSE.
India has a portfolio investment scheme (PIS) and FIIs have to be registered with it to buy and sell stocks of Indian companies. This scheme is highly regulated by RBI. One of the important regulations is that an FII cannot invest more than 24% of the paid-up capital of the Indian company. If the FII wants to invest more than this 24% in a company, then it requires approval and special resolution from the company’s board.
How do FII investments differ from retail investments?
Retail investors are individual investors like us. Individuals who invest and trade in stocks of companies are called retail investors. Retail investors trade to make money from the stock markets or invest for their personal and family goals and aspirations. On the other hand, FIIs invest solely to make money.
For retail investors, stock investments are a way to steadily build wealth over the long-term. Consequently, FIIs can have a short-term view of certain companies that they invest in.
The other difference is that FIIs usually have a larger investment volume than retail investors. An institution would prefer to have a sizeable chunk of the company’s stocks to make substantial profits out of it.
How does FII differ from DII?
Domestic institutional investors (DII) are similar to FIIs in the sense that they are also institutions that invest in the stocks of a company. The difference being that the DII and the company it is investing in are based in the same country.
What is the difference between FII and FDI?
FDI stands for foreign direct investment. Both FII and FDI are investments made in Indian companies by foreign companies. While FIIs buy stocks of listed companies, an FDI is an investment in an Indian company by its foreign parent.
FDI investments are basically a foreign company deploying capital to its Indian subsidiary. A recent example of FDI is Walmart’s investment in Flipkart. When Walmart paid $16 billion for a 77% stake in Flipkart, what it did was make a foreign direct investment in an Indian company. The investment gave Walmart management control of Flipkart as well. On the other hand, if Flipkart was a listed company and Walmart had bought a huge chunk of stocks of Flipkart, then that would have been a foreign institutional investment.
With an FDI investment, a foreign company plays a part in the profits and losses of the Indian company. With an FII investment, the foreign company partakes in the appreciate or depriciation of the Indian company’s stock price.
How do FIIs affect share markets and stock prices?
Since FIIs invest huge sums of money in the Indian stock markets, their buy and sell calls have a major impact. When FIIs are net buyers--which means that they have collectively invested more than they have redeemed--the stock markets do well. And vice versa.
Indian companies require capital to run and expand their businesses, which is why they list stocks of their company on the exchanges. Since retail participation in India is low, a bulk of these stocks are bought by FIIs. Hence, in simple terms, if FIIs invest more, the stock markets treat that as positive news.
This is why FII holding is an important metric to evaluate a company or sector. FIIs carry out the highest amount of due diligence before they invest, which is why a company they put their money can be considered to be fundamentally and technically sound.
How can one find daily FII activity?
The websites of the National Stock Exchange and the Bombay Stock Exchange carry data on FII activities on their respective bourses. This data is available for public consumption and is updated on a daily basis.
If an investor is looking to filter stocks on the basis of FII activities, they can do so using the Tickertape screener. Read more on that here.
How does FII activity affect MMI?
The Market Mood Index tracks the net open interest of FIIs in Index Futures on NSE. A higher average value of the same depicts a bullish FII view of the markets.