Foreign Institutional Investors and Domestic Institutional Investors

Domestic institutional investor (DII) is a term which refers to Indian mutual fund companies, life insurance companies and banks. Traditionally, Indian stock market were dependent on the money flow from the outside the country for sustainable rallies. These players are foreign financial institutions which trade in Indian stock markets. FIIs have consistently dominated the Indian stock market and its rise and fall is directly related to their investments in India.

India has been one of the favorite investment destinations for the foreign institutional investors but post economical recession in west which included most part of the Europe and USA, India became even better for their investment decisions. Stock market in USA and other western economies were not yielding any return in that phase and Indian economy was lot more stable. So they FIIs funds flooded Indian stock markets.

In 2009 and 2010, Indian stock market rose exponentially after falling drastically in 2008. Indian stock market outperformed most of its peers. It helped local Indian investors to garner huge returns over their investment but at the same time, it increased the dependability of Indian stock market on FIIs for its up move.

Now local and global Geo-political scenario is not so favorable in the short term, even if Indian growth story is still intact in the long term. Economical situation in the west is gradually recovering and showing positive developments. This has lead to the withdrawal of the FII funds from the Indian market.

Indian stock market has been struggling for last few months and each time there is positive news regarding economical development in west, Indian stock markets tumble down. In the meantime, there is one extremely positive development in India which went almost ignored and that is – rise of DIIs.

DIIs have always existed; there is nothing like they never existed. It’s just that they have emerged as net buyers in last few months. And now as markets are stabilizing, discussion regarding their role in stability of Indian stock market is heating up.

They are the net buyers of Rs 11,076 crore in fourth quarter of FY after being the net sellers for last two quarters. Indian stock markets were beaten up severely and it had bought the valuation at the reasonable level. And at the same, investors were investing in life insurance, Equity Linked saving schemes and other tax saving instruments. Both factor combined together resulted in their massive investment in Indian equity market.

It is imperative for Indian investors to have strong DIIs because the factors outside can easily influence FIIs where as DIIs are much more stable than them. FIIs have lot more options and they prefer to rotate their funds among emerging markets which result in withdrawal from one market and investment in another.

DIIs will invest most their funds in Indian equity market so they are more secured and reliable and therefore rise in their investment is definitely a very positive indication for Indian investors.