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What is FII and DII in the Stock Market?

Created on 07 Apr 2022

Wraps up in 6 Min

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Updated on 07 Sep 2022

Reading headlines like “FIIs pumped in money, and the nifty closed at 17000 rallying over 400 points in one day” got me wondering who these people who “rallied” the stock market are.

Are they Insiders? Or do they control the market? Why does everyone give their investment in a particular sector so much importance? Why is their entry always so exciting and exit always so panicking for everyone?

No need to panic. They are not as horrifying as they may sound. But there is some mystery surrounding them. A mystery we aim to dispel today as we find who FIIs and DIIs are and how their presence is good for our economy.

What are Institutional Investors?

 An institutional investor is an organisation or an institution that invests in different companies and manages the fund on behalf of its clients or members. Hedge Funds, Insurance Companies, Mutual Funds and banks are different types of institutional investors.

Institutional Investors generally have a large amount of money with them to invest, so whenever there is an outflow or inflow of money by institutional investors, it exerts a great influence on the stock markets in a positive as well as a negative way.

Gradually and slowly, institutional investors have increased the assets under their management enormously. This has been supported by the rapidly growing stock market as well as individuals relying on Fund managers for their investment needs. The shift to defined contribution plans from defined benefit plans has also relied more on institutional investors.

There are two types of Institutional Investors

1. Domestic Institutional Investors (DIIs)

DIIs invest in the companies listed in the stock market of the country they are registered or headquartered in. For example, Whenever any Indian An institution like ICICI bank invests in any company in India it will be a Domestic Institutional Investment. 

2. Foreign Institutional Investors (FIIs)

FIIs invest in companies that are foreign to their country of origin. FIIs are important to emerging economies because they bring funds and capital to businesses in developing countries. Some examples of FIIs are DSP Blackrock, JP Morgan, etc.

 FIIs and DIIs together consume around 35% of the total trading activity done on NSE on a normal trading day. 

LIC is the largest institutional investor in Indian Markets with an AUM of around 38 lakh crore rupees out of which 9.6 lakh crore rupees is invested in stocks which makes it 30% of total Domestic Institutional Investors Holdings. And LIC’s stake is around 4% in the total stock market (which is huge).

LIC has major holdings in companies like ITC (16.66%), L&T (12.16%), OIL INDIA LTD (11.85%), COAL INDIA (11.01%), RIL (6.13%), and many big companies.

Mutual Funds are now becoming the most popular way to invest by retail investors. Mutual Funds or Asset Management Companies are also institutional investors which have significant holdings in big companies. All the AMCs combined have an average AUM of 38 lakh crore rupees. This still is lesser than the assets managed by LIC alone.

We can see that institutions do have huge amounts of funds available to them, so they have the capacity to buy or sell shares of a company in large volumes, which could cause an influence the price dynamics of a stock.

Any institutional investor wishes to beat the market and generate an alpha ( i.e. returns generated above and over the benchmark) after deducting its expenses. In order to do that, it often takes risks higher than expected.

Even though any fund might have provided good returns, it may have taken an excessive risk, which might not be acceptable to the investors. So it should be kept in mind whether the returns are risk-appropriate for any investor or not.

Now let us find the reason behind these institutions going to foreign countries to find investment opportunities.

Why do institutions invest in foreign markets?

The main motive for any investor is to be able to get great returns, and developing economies like India and Taiwan offer greater opportunities for growth for  Investors in Developed economies like the USA.

We all have heard of a saying called ‘never put all your eggs in one basket, and any good portfolio should have a diversification of stocks and companies of various industries, sectors as well as geographical diversification.

Investing in a foreign country gives the institution a portfolio diversity across different geographies, which can help them compensate for the volatility of a single economic region and reduce risk in the long run.

Investing in foreign countries can also give you the benefit of your home country’s currency depreciation. Whenever you invest in any foreign company, you invest in the currency of the country in which the stock is listed, so if I want to invest in a stock listed on the New York Stock Exchange (NYSE), I can only invest in US Dollars, so whenever I sell the stock, not only I benefit from the appreciation of the stock, but when I sell it in USD  and get my money back into INR, the appreciation in the exchange rate is also my profit.

Let's say you invest in Netflix at $100, which was equal to around ₹70000 rupees in December 2018, the stock appreciated to $172, and the currency appreciated to ₹76. So while selling it, I not only made the appreciation of my stock but also benefited from the appreciation of USD.

The governments of developing economies often provide benefits to foreign investors by offering them subsidies, tax holidays and other benefits like creating Special Economic Zones (SEZ). Institutions are attracted to such countries that provide so many incentives to businesses, which makes them a better choice for investment.

But what are the basic differences between FIIs and DIIs, and how is their presence good for India?

Difference between FII & DII

BASIS

FIIs

DIIs

HEADQUARTER

Different from the country of investment.

Same as the country of investment.

CEILING ON OVERALL INVESTMENT

Upto 24% of the overall paid-up capital of the company.

There is no such ceiling on ownership for DIIs. 

INVEST IN COMPANIES

Listed in foreign countries.

Listed in their own country.

STOCK MARKET HOLDING

Hold around 21% of the total holdings in Nifty 500 companies.

Holds around 14 % of the total holdings in Nifty 500 companies.

PURCHASING POWER

Greater than DIIs because of more developed financial institutions.

Lesser than FIIs

Importance of FII and DII in India

Globalization

The spread of Globalization and Liberalization has increased the prevalence of businesses worldwide, giving an open world for everyone to do business. This movement has allowed the free flow of capital across borders, which has helped businesses in India to get capital from foreign countries easily. This has helped Indian Businesses to grow with the guidance and experience of big Institutions. 

In March 2020 when the whole market crashed due to the fears of the covid 19 pandemic, FIIs and DIIs had a huge role in the market’s recovery. In only four months, FIIs and DIIs cumulatively had a net inflow of 26000 crore rupees which helped Nifty rise back to pre covid levels.

Whenever these institutions invest money in the Indian stock market, it has been shown as a green indicator of the performance of the market.

When any DII or FII has a holding in any company, it gives investors confidence in the financials and the future of the company. This investment boosts the manufacturing and services sector and results in the creation of jobs and leads to higher per capita income improving the overall economy of the country.

Forex Reserves Impact of FII

Inflow of investments by FIIs in a country increases and strengthens the Forex reserves of a country, as more foreign currency comes to India, Which gives investors confidence in a country’s economy and also places the country in a better position to meet its external finance obligations. 

Higher Forex Reserves give the central bank a better position to be able to undertake open market operations, which strengthens the domestic currency. 

How to find FII and DII holdings in stocks

While analysing stocks, one of the factors that are taken into account is the Share Holding Pattern, where you can find the percentage holdings of FII, DII, promoters, public and others. 

But where can you find the data of the Share Holding Pattern? 

Well, where else than Investing Ka Search Engine, Ticker

Let’s take a look at the shareholding pattern of ICICI bank.

In Ticker you can find not only the shareholding pattern of stocks but various tools to analyze them and make a better decision. 

Conclusion

We learned how institutional investors’ presence in a country’s stock market is beneficial for the economy of a country. Their involvement in a company provides credibility and confidence to investors. These institutions have also helped create more democratic and free markets with lesser government interventions and restrictions.

Hopefully, now we will be better able to understand these newspaper headlines.

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Ayushi Upadhyay

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A Keen Learner. Tiny, brainy, and studious, this quiet one stays in her zone until she pops. And once she does, boy, are her comebacks snappy! There is no financial question that she can't answer through her magical blog-writing. 

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