DIIs making up for exit by foreign players

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The markets have been zooming for some time now. This is despite the fact that foreign portfolio investors have been selling. There were times earlier when sales by FPIs would lead to a crash in the market, but that is no more the case. So what has changed? To understand the answer to Tarachand’s question, we need to look at some numbers.

The money coming into mutual fund schemes through SIPs not only provides relief to the stock market from the erratic selling by foreign investors but it is also increasing the dominance of mutual fund houses in the market.

According to a report by the National Stock Exchange (NSE), the holding or stake of mutual funds in companies listed in India rose to a record high of 8.9 percent in the March quarter. While the stake of foreign portfolio investors in NSE-listed companies fell to 17.9 percent, the lowest level in 12 years.

According to the data from the equity market tracker Prime Database’s initiative primeinfobase.com, the total stake of domestic institutional investors (DIIs) in companies listed on the NSE increased from 15.96 percent at the end of December 2023 to 16.05 percent as of March 31, 2024. The data shows that the gap between FPIs and DIIs is narrowing, reaching the lowest level so far. DIIs include mutual funds, insurance companies, pension funds, NBFCs, asset reconstruction companies, etc.

Foreign portfolio investors (FPIs) have been the largest non-promoter investors in Indian stock markets. However, market experts believe that this trend is likely to change soon. With the increasing investment in mutual funds, domestic institutional investors (DIIs) may overtake foreign investors in the coming quarters.

In the past, even a little selling by foreign institutional investors would cause the market to stumble. Heavy selling would lead to a market crash. The strategy of FPIs was to sell at high levels to book profits and buy cheaply when the market fell.

However, since the COVID pandemic, when retail investor participation in the market increased, whether through mutual funds or direct investment, this trend has changed. When FPIs sell heavily, DIIs and retail investors are aggressively investing in the market, helping to support it.

In March 2024, investment in mutual funds through SIPs reached an all-time high of ₹19,271 crore. This figure was ₹14,276 crore in March 2023.