Every evening, market participants across the country scan the numbers released by exchanges to see who bought and who sold during the session. Among the most closely read disclosures is the fii dii data, which shows how foreign and domestic institutions have deployed money in Indian equities. Those figures become even more meaningful when read alongside sectoral indices, and the Nifty Bank is often the first place where institutional conviction becomes visible. Understanding how large pools of capital behave helps ordinary investors interpret price movements calmly instead of being startled by them.
Who the Big Players Really Are
Institutional participants can be broadly classified into two categories. The foreign portfolio investors manage funds on behalf of overseas pension funds, insurers, sovereign wealth pools and asset managers. The domestic counterparts comprise mutual funds, insurance companies, pension funds and banks that invest on behalf of Indian savers. Both have huge sums of money to deploy and even small shifts in their allocations can make big difference in price movement, especially in case of large liquid stocks.
The driving factors for the two categories differ. For the foreign investors, it is about how India compares to the other emerging markets in terms of valuation, growth prospects, exchange rate movements etc. The domestic institutional investors, on the other hand, are driven by the regular inflows in the form of systematic investment plans and insurance premiums. This makes their flows more consistent and to a large extent, explains why domestic buying has more often than not, negated the impact of foreign selling.
Interpreting Daily Net Buying and Selling
The net buying figure is actually the difference between the total value of shares purchased for each category and the total value of shares sold. A positive figure implies net buying and a negative implies net selling. But you must not conclude from a single day’s worth of figures because the inflows and outflows tend to get skewed by rebalancing, index-related trades, block dealing etc. You should look at a rolling week-on-week and month-on-month basis.
If there is a consistent buying activity for a few weeks, it is worth noting. Similarly, the buying or selling activity in the cash market should be cross-checked with the position in the derivatives market. The institutions tend to hedge and if an investor in the foreign category is selling shares in the cash market, he might be simultaneously buying index futures, which reduces his net exposure.
Flows and Price Discovery
While the flows impact the prices, there are other factors too. Earnings growth, interest rate expectations, inflationary developments, crude oil prices and monsoon conditions are some important variables. Flows are more of an enhancer to the trend; it is not a creator of trends. If the valuations are reasonable and corporate profits are growing, the inflows will complement and enhance the rise in prices. A change in the monsoon pattern and associated uncertainty can intensify a downturn that was set in motion by profit warnings from companies in the sector.
Currency fluctuations also have an impact to the extent that investors are concerned about how much returns they are likely to make in their home currency. A weaker rupee makes their investments in India less rewarding. A weaker rupee also makes buying foreign assets expensive. So flows in either direction are impacted by the currency movement. Understanding these linkages will help you explain why the market behaved the way it did, despite good domestic news or despite the news that was bad for local markets.
Using the Information Wisely
The investors should consider the institutional flows as one of the inputs to their decision-making processes and not as an indicator to take buying or selling calls. The flows are the result of meticulous research by the professionals who have a longer time horizon. It is a mistake to try and mimic every buying and selling decision that the institutions make. Similarly, it is not advisable to make big changes to your portfolio in response to a flow reversal.
But, a closer watch of the inflow and outflow trends will help you identify the background to the prevailing market condition. For example, a consistent foreign selling combined with strong domestic buying will keep the indices in a tight range for some time, while broad buying from both categories will indicate a positive trend. Once you have that background, you can combine it with your understanding of the market and your own requirements to make better investment choices. Don’t make impulsive decisions to tweak your portfolio that has been put together in good faith and after careful deliberation, on the back of a single day’s flows, which is bound to be skewed by factors like block dealing and index rotations.
See also: Boost Your Brand Reach What Tech Came Out in 2022 Jotechgeeks Web Solutions
Developing an Investment Philosophy
Maintain a simple record of monthly flows and track the movements in tandem with the index movements to understand the correlation. The more you do this, the closer your comprehension will be of the real and imagined trends in the equity market. It is essential that one maintains a diversified portfolio, makes systematic additions to the portfolio through SIPs and reviews one’s investment portfolio on a fixed time frame. Having said that a SEBI-registered investment adviser can help you fine-tune your understanding of the market to your own personal situation. This article is a general piece of information and should not be used as a recommendation to buy or sell any security.
