In the stock market, retail investors are far from the only participants. In fact, institutional investors are the major contributors to the daily trading volume in both the equity and the derivative segments. Institutional investors are large corporations and firms with huge investment capital reserves and high risk appetites such as mutual fund houses, banks, other financial institutions, and even insurance companies, among others.

There are two main categories of institutional investors, namely Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs). Both these investors combined actively buy and sell the shares of multiple companies in the stock market. Since they’re large entities with virtually endless pockets, they have the capacity to move the markets with their trading patterns.

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Institutional Investor

What does the FII and DII inflow and outflow data signify?

The trading activity of both the FIIs and the DIIs are recorded for every single trading session by the stock exchanges. The data is then compiled into monthly reports and is published in the public domain for investors to see. Let’s take a look at the trading activity of both FIIs and the DIIs during the previous 5 months.                 

FII data (Rs. in Crores) & DII data (Rs. in Crores)

Date Gross Purchases Gross Sales Net Purchases / (Net Sales) Gross Purchases Gross Sales Net Purchases / (Net Sales)
April 122,483.01 127,691.51 (5,208.50) 75,066.03 75,183.03 (117.00)
May 155,977.41 142,062.92 13,914.49 87,531.66 75,238.4 12,293.19
June 155,215.80 149,722.85 5,492.95 100,174.07 97,739.67 2,434.40
July 113,501.55 111,011.36 2,490.19 89,373.83 99,381.71 (10,007.88)
August 131,434.85 115,684.99 15,749.86 77,599.64 88,646.42 (11,046.78)

In the month of April, 2020, right around the time of the nationwide lockdown, both FIIs and DIIs pulled out their investments from the equity markets. This led to a net outflow of money of around Rs. 5,208.50 crores and Rs. 117 crores respectively.

However, once the markets started to bounce back from the steep lows in March and April, 2020, both the FIIs and the DIIs started to come back into the market by buying more number of shares. This led to a net inflow of money from both these market participants. From this data, we can infer that in the first three months starting from April, 2020 both the FIIs and the DIIs seemed to be moving in tandem with each other.

That said, the last couple of months, specifically, July and August, seem to paint a different picture altogether. In a surprising move, the flow of money from these two categories of institutional investors moved in opposite directions. The FIIs pumped in money into the equity markets and created a net inflow, while the DIIs exited it and created a net outflow.

Why has the FII and DII flow into the equity markets been moving in the opposite directions? 

According to a research conducted on the trading behaviour of both FIIs and DIIs in the Indian stock market scenario, it is quite evident that they adopt opposite trading strategies. FIIs adopt a positive feedback trading strategy, while the DIIs adopt negative feedback trading strategies and are known for their contrarian views.

When market participants take positions that are in tandem with the market movement, it is usually termed as ‘positive feedback investing.’ For instance, if the market is moving upward, positive feedback investors tend to buy shares. And when the markets are moving downward, they tend to sell their shares.

When market participants take positions that are opposite to that of the market movement, the strategy is termed as ‘contrarian investing’ or ‘negative feedback investing.’ For instance, if the market is moving upward, negative feedback investors tend to book profits by selling shares. And when the markets are moving downward, they tend to pick up shares.

Applying this research finding into the current market scenario, it becomes quite obvious as to why the flows from FIIs and DIIs have been moving in the opposite directions. As the markets almost fully recovered from the sell-off, FIIs, with their positive feedback trading strategy, started lapping up the shares of various companies. As the markets continued to move upward, the FIIs went along with the flow, thereby creating a net inflow for the months of July and August, 2020.   

Meanwhile, when the markets bounced back and moved upwards, the DIIs, with their contrarian views and negative feedback trading strategy, started to book profits by selling their holdings. This ultimately created a net outflow for the months in contention. 

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Apart from the profit booking motive, another reason for the net outflow of DIIs could be due to the need to increase their liquidity buffers. According to financial experts, there’s a high possibility of a spurt in the deal activity of many major large-cap companies in the near future. And by booking profits, DIIs have effectively opened themselves up for participation in these deals.

Clearly, the markets are quite volatile now. And in uncertain times like these, it becomes even more essential to formulate a solid financial plan and a good wealth management strategy to safeguard your investments. Here’s where Tata Capital’s wealth management solutions can be of help. By availing these services, you can protect your corpus and ensure that it’s placed in the right assets for long-term growth.

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