Tata Capital > Blog > Wealth Services > Why has the FII and DII flow into equity markets been moving in the opposite direction since a couple of months?
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.
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.
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.
09 October 2020
5 mins read
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