If you're just learning about the stock market, you might hear a lot about big investors influencing market trends. Two important types of such big investors that you must know about are Foreign Institutional Investor (FIIs ) and Domestic Institutional Investors (DIIs). Simply put, these are large organisations that invest huge amounts of money in the stock market. FIIs , as the name suggests, are investors from outside India, while DIIs are based within India.
Understanding what is FII and DII and how each operates can give you better insights into the stock markets. In this blog, we'll explain the roles of FIIs and DIIs, factors that differentiate them, their impact on the market, and what you need to know as an investor in India.
FIIs and DIIs both shape the Indian stock market. While one group invests from abroad, the other invests from within India. However, to find out what truly differentiates them, look at the factors listed below.
|
Aspect |
Foreign Institutional Investor (FIIs ) |
Domestic Institutional Investors (DIIs) |
|
Origin |
Based outside India |
Based within India |
|
Type of Investments |
Invest in foreign markets and bring international funds to Indian markets |
Invest local funds in Indian markets |
|
Market Influence |
Often cause significant market movements due to the large amount of funds they can mobilise |
Influence is more stable as they invest consistently, a less substantial impact by global instability |
|
Regulatory Environment |
Subject to both home country and Indian regulations |
Primarily regulated by Indian laws and regulations |
|
Investment Focus |
May focus on short-term gains due to currency exchange rates and global events |
Often focus on long-term investments due to understanding of local market dynamics |
|
Impact of Global Events |
Highly sensitive to global economic changes and political events |
Less affected by global events, more by domestic circumstances |
FIIs and DIIs come in various forms, each with specific investment strategies and goals.
Listed below are the types of FIIs .
These funds collect money from international investors and invest in Indian stocks and bonds. For instance, Vanguard International Growth Fund is an American mutual fund that actively invests in Indian markets.
These funds manage retirement savings and invest in various markets, including India, to ensure steady returns for pensioners. For example,Canada's Ontario Teachers' Pension Plan has made significant investments in Indian markets.
These high-risk investment funds seek great returns by investing in diverse markets, including India. Bridgewater Associates is a prominent U.S.-based hedge fund that regularly invests in India.
These are investment funds owned and managed by governments. They use excess money from the country's savings to invest in different types of assets worldwide, including stocks and bonds in markets like India. The Abu Dhabi Investment Authority (ADIA) is a sovereign wealth fund that invests in Indian markets.
Now, let's explore the different types of DIIs.
These funds collect money from Indian investors and invest in the domestic stock market. HDFC Mutual Fund, for example, is one of the largest mutual funds in India and actively invests in the Indian stock market.
These firms invest premium money collected from policyholders in the stock market to ensure they can pay out claims and grow their business. Life Insurance Corporation of India (LIC) is a major player that uses policyholders' premiums to invest in a wide range of equity and debt instruments.
Indian banks invest in the stock market to manage their surplus funds and earn returns. ICICI Bank, a leading private sector bank in India, routinely invests part of its surplus funds in the stock market.
Similar to foreign pension funds, these manage the retirement savings of Indian citizens and invest in the stock market for steady growth. The Employees' Provident Fund Organisation (EPFO), which manages the provident fund and pension fund for the Indian workforce, makes significant investments in Indian equities to ensure long-term capital growth for its members.
Also read: 5 Tips to Invest in the Equity Market
The trading activities of FIIs and DIIs play a crucial role in shaping stock market trends and dynamics. But what exactly happens when these financial giants move money in and out of the market?
Let's understand the mechanics and impacts of their trading actions.
1. Market Sentiment
When FIIs invest heavily in the Indian market, it often boosts investor confidence and drives stock prices up. Conversely, when they pull out funds, it can lead to a decline in market confidence and falling stock prices.
Example: In May 2023, Foreign Institutional Investor (FIIs) went on a buying spree in the Indian equities market. Over the course of just seven trading sessions, FIIs invested ₹11,427 crore, marking the highest buying spree for the year.
2. Liquidity
FIIs bring sizeable capital into the market, increasing liquidity. This makes it easier to buy and sell stocks. When there’s liquidity in the market, there are also fewer chances of large price movements.
1. Market Stability
DIIs often act as stabilisers in the market. When FIIs withdraw their investments, DIIs can step in to buy stocks, preventing sharp declines.
Example: In March 2024, during a period of substantial FIIs withdrawal, DIIs demonstrated a stabilising role in the stock market. The share of DIIs in the market surged to a record 16.05%, driven by investments of around ₹1.08 lakh crore during the first quarter of 2024.
2. Long-term Investment
DIIs typically have a longer-term investment horizon than FIIs , which can help maintain steady stock market growth.
As of December 2023, while FIIs held around 19.4% of the total market capitalisation in India, DIIs' share reached a record high of 14.2%. Market capitalisation, or market cap, is the total value of all a company's publicly traded shares.
This surge in DII shareholding is driven by strong net inflows into mutual funds, with DIIs investing over ₹1.8 trillion in 2023 alone. These investors significantly impact market trends and stock prices.
But, what does FII and DII activity mean to you, how does it impact you?
FIIs , influenced by global economic conditions, often bring volatility, while DIIs provide stability with their long-term investment approach. So, when FIIs and DIIs are investing heavily in stock markets, you can expect the markets to be on an upward trend and vice versa. While this cannot be the only criterion to make investment decisions, you can be better placed on what to expect from markets if you keep a close watch on FII and DII investment movements.
To find out about FII and DII investments, you can visit SEBI website.
Understanding FIIs and DIIs is key for investing in the stock market. FIIs bring in big money and influence trends, while DIIs offer stability and long-term growth. Knowing how they operate helps you make smarter investment decisions. You can also up your stock market game by accessing stock market related resources on the Sharekhan Knowledge Centre.
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