What are FIIs and DIIs?

Although there has been a recent influx of retail investors in the Indian financial markets, they hold very little power to swing the prices. Institutional investors, who are large-scale entities with significant purchasing power, are the ones who exert significant influence over the movement of the markets.

Institutional investors can be broadly classified into two categories: FIIs and DIIs. Whether you are a short-term trader or a long-term investor, knowing what these two categories of investors are and how analysing FII and DII data can help provide insights on potential market movements is crucial.     

In this article, we will delve into FIIs and DIIs and examine the pivotal role they play in shaping market dynamics. 

What are FIIs and DIIs? 

Foreign Institutional Investors, or FIIs, are entities incorporated outside India that invest in the Indian financial markets. By investing in the Indian markets, FIIs infuse foreign capital into the Indian economy, contributing to its growth and development.

On the other hand, Domestic Institutional Investors, or DIIs, are entities incorporated in India that invest in the Indian financial markets. By investing in the country’s financial markets, DIIs mobilise domestic savings by channelling them into productive investments that fuel the growth of the economy.  

Since FIIs and DIIs are large-scale entities with significant financial power, they have the ability to infuse liquidity into the markets and have a certain degree of control over the price movements of assets. This is one of the many reasons why the activities of FIIs and DIIs are closely monitored by the Securities and Exchange Board of India (SEBI). In fact, to operate within the Indian financial markets, these institutional entities must be registered with SEBI and abide by the various rules, regulations, and restrictions imposed by the market regulator.   

What are the Different Types of FIIs and DIIs in the Indian Financial Markets?  

Now that you are aware of what FIIs and DIIs are, let us now look at the various types that usually participate in the Indian financial markets. 

Types of Foreign Institutional Investors (FIIs) 

Some of the most common FIIs that the Indian markets witness include, but are not limited to, the following entities: 

• Pension Funds and Mutual Funds

Pension funds are retirement benefit funds from foreign countries that invest in emerging markets, such as India, as a means to diversify their portfolios and get higher returns. Some international mutual funds also invest a portion of their assets in the Indian financial markets for the same purpose. 

• Hedge Funds 

Hedge funds are private mutual funds that are often only available to high-net-worth individuals. These funds use various high-risk strategies to generate significant returns for their investors. Many foreign hedge funds routinely invest in the Indian markets, especially in the derivatives segment. 

• Sovereign Wealth Funds

Sovereign wealth funds are foreign government-owned investment funds that invest their country's surplus wealth in Indian markets for diversification.

• Investment Banks

Investment banks are global financial institutions that invest their own capital in various foreign markets, including India.

Types of Domestic Institutional Investors (DIIs) 

Similar to FIIs, Domestic Institutional Investors are also of different types. Here is a quick overview of some of the most prevalent DIIs in Indian markets. 

• Mutual Funds

Indian mutual funds pool money from domestic investors and invest in various financial instruments, ranging from stocks to bonds. These funds account for the majority of the DII activity in the country’s financial markets. 

• Insurance Companies

Indian life insurance and general insurance companies routinely invest the income they get from their policyholders as premiums in the financial markets to generate returns. These returns are often shared with policyholders in the form of bonuses. 

• Banks

Indian banking institutions invest a portion of their deposits in government securities and other fundamentally strong financial instruments in a bid to earn additional income from them. 

How Do FIIs and DIIs Impact Market Behaviour? 

FIIs and DIIs can significantly influence market behaviour through their investment activities. Here are some of the many ways in which these entities exert influence over the Indian markets. 

• Infuse Liquidity

FIIs and DIIs extensively contribute to market liquidity. By buying and selling financial assets in large numbers, they increase trading volumes. This makes it easier for other market participants, like retail investors, to execute trades easily and more efficiently without having to compromise on the price.  

• Help with Price Discovery

Institutional investors like FIIs and DIIs employ dedicated and experienced research teams that fundamentally and technically assess an asset before investing. This research-driven approach often leads to accurate valuations of assets in the market and helps with better price discovery. 

• Contribute to Market Stability

Domestic Institutional Investors often tend to step in to buy assets when FIIs sell their holdings and withdraw funds from the Indian markets. This creates a counter-balancing effect that stabilises the market by reducing volatility, especially during periods of global economic uncertainty.

• Impact on the Indian Currency

The inflows and outflows of funds from Foreign Institutional Investors can substantially impact the value of the Indian Rupee against foreign currencies. For instance, large FII inflows often strengthen the Indian Rupee, whereas large outflows can depreciate the currency.   

Also Read: The Beginner’s Guide to Exchange-Traded Funds (ETFs) in India

Conclusion

Both FIIs and DIIs are integral to the proper and efficient functioning of the Indian financial ecosystem. The interplay between these two categories of institutional investors influences everything from stock prices to economic policies. As a market participant, understanding the nature and effect of FII and DII activity can help you make informed investment decisions. 

Research 360, a stock analysis platform by Motilal Oswal, provides crucial FII and DII data for every trading day. The platform showcases the net inflows and outflows from both of these institutional investors in cash, index futures, index options, stock futures, and stock options. Analysing FII and DII data can give you insights into how the broad market is likely to move in the near future, which you can use to make informed trading and investment decisions. Visit Research 360 today to experience this feature and a host of other useful trading-related information.