Few forces move Indian markets as visibly as foreign money. When overseas investors buy heavily, benchmark indices often climb; when they sell, the pressure can be felt across large-cap stocks. Market followers who watch Dow Jones Live trends often see early hints of how global funds may behave in the coming sessions. Likewise, shifts in the Hang Seng Index can reveal whether regional investors are becoming more cautious or more adventurous. Understanding the mechanics of foreign flows helps domestic investors read market movements with greater maturity.
Who Are Foreign Portfolio Investors?
Foreign portfolio investors (commonly referred to as FPIs) are entities such as global mutual funds, pension funds, insurance companies, sovereign wealth funds and hedge funds that invest in Indian equities and debt instruments through approved channels in India. FPIs are important because even small inflows or outflows on their part have a significant impact on the markets.
FPIs are driven by macro factors such as growth expectations from India, relative valuations, earnings from Indian companies, rupee value, interest rates and global risk appetite. If these factors undergo a positive change, FPIs are likely to come in. If not, they are inclined to move out of Indian assets.
Impact on different segments
While FPIs can come in and go out of the Indian markets as a whole, they are likely to hold larger positions in large-cap stocks, especially in the banking, financial service, information technology, energy and consumer sectors. Thus, during a period of FPI-driven selling, the Sensex and Nifty tend to get hit more than mid and small-cap stocks. In the fixed income space, FPIs have a bearing on the yields of government securities and the value of the rupee. In other words, large-scale inflows or outflows by FPIs can influence the currency and interest rate scenarios, prompting the Reserve Bank of India to take regulatory steps in such situations.
The big domestic institutional investors
One major reason why the Indian markets have witnessed less severe impact on account of FPI selling is the huge domestic institutional investor (DII) base, comprising mutual funds, insurance companies and pension funds. DIIs have large amounts of retail money and tend to soak in the sales by foreign institutional investors (FIIs). This has had an important impact on the way the Indian markets function.
Earlier, sharp FIIs sales would lead to steep declines on Indian bourses. However, with the rise of DIIs there has been a change, as a lot of retail investors are now buying stocks through systematic investment plans (SIPs) in mutual funds. This has led to an overall improvement in market sentiment. However, large-scale FIIs sales can still have a negative impact on investor morale.
How to read the FPI data?
The inflows and outflows by FPIs in Indian markets are reported every day in the financial dailies, in the form of exchange and depository data. The figures tend to generate a lot of buzz among investors, who wrongly interpret them as positive or negative omens for the stock market.
It is important for individual investors to ignore day-to-day inflows and outflows and look at the bigger picture. Some important questions to ask while interpreting FPI data are:
Are the inflows/outflows taking place on a consistent basis?
Are they impacting certain stocks or sectors?
Are they counteracting the impact of DIIs?
Such questions will give a better perspective to individual investors.
What should individual investors do?
Individual investors cannot control FPI flows, but they can certainly utilise the information to their benefit. One of the most important things they can do is to undertake diversification so as not to be unduly exposed to the vagaries of any one sector. It is also important to hold on to some debt and gold, as these assets are likely to cushion the impact of sharp declines in equities.
Investors should continue to utilise SIPs to park money in equities, while avoiding the temptation to take excessive risk by borrowing to invest. It is also important not to get spooked by FPI selling and redeem mutual fund units at a loss. Instead, they should take a long-term view and invest in fundamentally strong companies with good earnings prospects and reasonable valuations. After all, it is such companies that will be able to withstand the FPI onslaught and deliver returns to investors over time.
India has a huge potential to draw in FPIs on account of its young population, large consumer base and increasing digital penetration. However, individual investors need to build their own financial moats to protect themselves against FPI volatility.
