You might have come across numerous headlines about the Indian Economy. Like “FII turned net sellers for 16 days in a row in Indian Stocks with outflow over INR 23,800 crore.” Also, other news like “DII bought shares worth INR 1083.17 crore in Jan 2023” etc. Not just these but there is multiple news regarding the terms “FII” and “DII.” Does it make you ponder what these are? If yes, then this article is perfect for you! We will provide a thorough explanation regarding, “What are FII and DII in the Indian Stock Market?” Here it goes-
Brief Overview of FII and DII in the Indian Stock Market
The acronyms FII and DII refer to Foreign Institutional Investors and Domestic Institutional Investors respectively. Before digging deep into these terminologies, let us briefly understand “Institutional Investors.”
Institutional Investors (FII and DII)
Institutional Investors are companies or organizations that invest money in assets or stocks on behalf of clients. Sounds a bit complicated? Well, these are the entities that pool money from numerous investors (clients) and invest it into various financial securities. Some common examples of Institutional Investors are-
- Mutual funds– It is an investment vehicle that collects money from the public to “mutually” invest in financial instruments like stocks and bonds. A professional manager is present in Mutual funds who maintains the portfolio of stocks, bonds, and other securities.
- Hedge funds– It is a limited partnership of private investors. Here professional fund managers pool money from those investors using a wide range of strategies. So that they can trade or invest in non-traditional assets to earn high investment returns. It is called “Hedge funds” because of the usage of the whole array of hedging techniques to decrease portfolio volatility.
- Pension funds– It is a funding scheme to provide retirement income to employees by pooling monetary contributions.
- Insurance companies– These are the corporations offering insurance services. They provide financial protection from possible harm or hazard in the future.
- Investment trusts– These are the public limited companies aiming to make a large fortune by investing in other companies.
- Asset Management Companies– These are the firms that pool funds from partnered investors and invest the fund in different investment options. The various investment options include equities, debt, precious metals, real estate, etc.
Foreign Institutional Investors (FII)
FII is the institutional investors that gather money from various sources to invest in the financial markets of another country. Suppose, if a German hedge fund invests in our Indian Stock market, then we will call them FII. The FIIs are one of the important sources of capital for developing economies. However, there are certain rules and regulations that FIIs need to follow. We will discuss them in the upcoming sections (Explanation of FII).
Domestic Institutional Investors (DII)
Unlike FII, the DII (Domestic Institutional Investors) accumulate money from various sources to invest in the financial markets of their own country. That’s why they are called Domestic Institutional Investors. Indian Mutual Funds are the perfect example of DIIs. The political and economic conditions impact the investment decisions of DIIs. Further explanation is provided in the section “Explanation of DII.”
Explanation of FII
As you have seen above, FIIs (Foreign Institutional Investors) are nothing but institutions that invest in the domestic markets of a foreign land. This term is commonly used in India and China. Like any other institutional investor, FII also includes mutual funds, hedge funds, pension funds, investment banks, insurance companies, etc. So, here comes a detailed explanation-
Top FIIs in India
- Government of Singapore
- EuroPacific Growth fund
- Government Pension Global Fund
- Abu Dhabi Investment Authority
Why are FIIs interested in India?
Apart from the other examples, there are numerous other FIIs in our country. Now the question arises. Why are the Institutional Investors of developed countries immensely interested to invest in the market of developing economies like ours? Simply because-
- Developing economies provide higher growth potential to investors as compared to mature economies where the growth potential is stationary.
- The economy of developing countries is present in a logarithmic phase meaning it has a lot of scope for growth. Thus, it attracts foreign individual corporations to invest in it.
Rules & Regulations for FIIs
FIIs are a crucial source of capital for a developing country. However, they need to follow certain rules and regulations of the country in which they invest. In India, they need to follow the-
- Limits on the total value of assets– You must be wondering why despite offering benefits and capital to the country, the FIIs can purchase only a limited amount of assets and equity shares. Also, they can only have short to medium-term investment goals. The countries do so mainly due to the following reasons-
- To limit the influence of FIIs on individual companies and financial markets of the host nation.
- To prevent the potential damage that can occur if the FIIs flow on a large scale during a crisis.
- Country’s portfolio investment scheme– The FIIs can invest in the primary and secondary capital markets of India only through India’s portfolio investment scheme. It allows them to purchase the Indian companies’ shares and debentures on the public exchange of India i.e., NSE & BSE.
- Maximum investment on Paid up capital– FIIs can invest up to 24% of the paid-up capital of the Indian company that receives the investment. (Paid-up capital is the amount of money received by a company from the shareholders in exchange for stocks and shares). However, an FII can invest more than 24% only if the board members of a company pass a special resolution for it. Also, the maximum limit for FII to invest in public sector banks is 20% of the paid-up capital.
- Maximum investment on equity– The FIIs can invest up to 10% on the equity of a single company.
Explanation of DII
DII is the domestic institutional investors who invest in the financial assets and securities of their residential country (native/homeland). Just like FIIs, the DIIs also impact the net investment flows of a country. They pool money from the small investors of the country and then trade in financial securities and assets of the same country. Gradually, they emerged as an essential source of domestic funds for indigenous companies (Indian Companies).
Top DIIs in India
- One 97
- Cartrade Tech
How do DIIs work?
Unlike FII, DIIs can have long-term investment goals. They can effectively act as market movers because there are no restrictions on them regarding the value of assets or equities. Also, they can invest in multiple large as well as small finance banks. However, they need to qualify the criteria certified by SEBI to get established as Domestic Institutional Investors. Do you know, DIIs are known as “Market Movers.”? Because their buying and selling volutes can impact and alter the direction of stock markets. Their data is available on the NSE website where they need to provide information regarding the reasons for their investments and why they buy the securities.
Comparison between FII and DII in Indian Stock Market
The following table provides you with a comparative analysis between FII & DII in the Indian stock market.
|S. No.||Criteria||FII(Foreign Institutional Investors)||DII(Domestic Institutional Investors)|
|1.||The target location of the Investment||Foreign country||Own country|
|2.||Term of Investment||Only short-term or mid-term||Can be long-term, mid-term, or short-term|
|3.||Limits on the total value of the assets||Yes||No|
|4.||Maximum investment on paid-up capital||24%||No limit|
|5.||The maximum investment in equity||10%||No limit|
|6.||Impact on the stock market||Medium to High||High|
Role & Impact of FII & DII in the Indian Stock Market
- Highly influential– The FIIs and DIIs constitute almost 35% of the total activity in the Indian stock market. Thereby, heavily influencing it.
- Confer confidence to a large number of retail and individual investors– Apart from market impact, if an FII or DII invests in an ordinary company, then the share prices of that respective company reach sky-high limits. Eventually, it provides confidence to numerous retail and individual investors to invest in that company.
- Increase the forex reserves– The FII investments increase the foreign reserves of our country. Consequently, it enables the Indian government and RBI to execute monetary operations.
- Stock market volatility– The investment decisions of FII and DII can lead to stock market volatility.
- Liquidity of the stock market– Since, FII & DII pour in or take out a huge sum of money, therefore, they highly impact the liquidity of the stock market.
Conclusion (FII and DII in the Indian Stock Market)
Both foreign and domestic institutional investors play a significant role in making and enhancing the stock market of a nation. As businesses require capital to grow. Therefore, the money invested by FII and DII in the Indian Stock Market provides essential funds. These funds act as fuel for the expansion of indigenous businesses. Thus, FII and DII drive the trading activity in the equity and debt segments of the market.