FPI transaction or FII transactions are closely watched by analysts and broking houses. FPI activity or FII activity draws a lot of attention, which can be attributed to its direct correlation with stock market performance. A cursory look at stock indices performance in last ten years will prove this point. Although the correlation is not one to one, stock market moves up when FII pour money and it plunges when they book profit. Read on to find out how a retail investor can benefit from this love hate relationship of FII’s with Indian stock market.
Who are FPI/FII and Why are they Important?
FII (Foreign Institutional Investors) or FPI (Foreign Portfolio Investors) are companies established outside India which invest in Indian financial markets. They need to register with the Securities & Exchange Board of India (SEBI) to participate in Indian financial market.
FII’s helps in the process of economic development by providing riskier, long-term capital to companies for growth. Their presence improves efficiency of stock market and maintains the balance between stock price and its value. They help in financial innovation and improve corporate governance practices of companies. As they catalyse growth, government tries their level best to make them comfortable while dealing in Indian financial market.
FPI Influence or FII Influence on Stock Market
The extent to which FPIs/FIIs influence stock market movement is debatable, but their formidable financial muscle power definitely decides direction of the stock market. Since FPIs/FIIs buy and sell stocks in bulk and follow herd mentality, sustained buying/selling on their part results in a sharp rise/fall in prices. If we look at the historical data, whenever FIIs have withdrawn money, the stock market has fallen and vice versa. Impact is more prominent and direct when they pull out as it makes indices nosedive breaking all supports. This process gets repeated every now and then and same can be interpreted by comparing the FPI data/FII data and the Sensex/Nifty levels.
What to do as a retail Investor
As FPI/FII activity hogs the limelight, it makes sense to keep tab on their activity. As a retail investor, we do not have enough financial muscle to influence stock prices, but we can earn above-average returns just by following the footsteps of FPI/FII. If you find that FPI's/FII’s are gradually increasing their holding in a particular company, it can be a good indicator for making an entry. Remember, FII’s are backed by strong analytical team and they take investment decisions based on valuation and earning expectations. You as an individual investor seek the same, hence chances of going wrong is minimal. If the company is fundamentally strong, one should not think twice as the one who spots the FII footsteps early will be the most benefited one.
Word of Caution
A sizeable portion of FPI or FII money comes fast and exits fast (Hot Money). If you have entered at tipping point, you might lose a big portion of your capital if FPI or FII starts booking profit. Even though FPI's/FII’s are backed by a strong analytical team they are prone to mistakes. There have been case where their valuation model has failed and they have booked loses. If you are unlucky, you might find yourself in the same basket.
As discussed above, spinning investment strategy around FPI activity or FII activity might not pay if you enter in a stock at the fag-end of FPI investment/FII investment. You should be ready to bear the brunt in case there is sudden sentiment change as other market players like DII’s are not strong enough to absorb FPI selling/FII selling shock.