Foreign Institutional Investors (FIIs) are foreign investors in India's stock market, while Domestic Institutional Investors (DIIs) are domestic investors in the Indian stock market.
Difference Between FII & DII
3 min
20-May-2024
The Indian stock market is open to both retail and institutional investors. Institutional investors are organisations or companies that pool money from individual investors and other sources to invest in financial securities on their behalf. These investors generally carry a significant market pull since they trade in large securities blocks. Institutional investors can be classified as FIIs and DIIs.
In this article, we will elaborate on what FII and DII mean in the share market and the differences between these two concepts.
Who are FIIs?
Foreign Institutional Investors (FIIs) areinstitutional entitiesthat invest in the financial markets of a country other than the one where they are registered or headquartered.The term “FII” is commonly used in India, where it refers to outside entities investing in the nation’s financial markets.
Here are some key points about FIIs:
- Definition: FIIs are investors or investment funds from foreign countries that participate in the capital markets of a host country. They engage in various financial instruments such as stocks, bonds, and other securities.
- Role: FIIs play a significant role in providing finances and capital to enterprises in developing countries. Their investments can impact market liquidity, stock prices, and overall economic growth.
- Trading activity:You can track FII trading activity on stock exchanges like the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), and Metropolitan Stock Exchange of India (MSEI).The data includes information on their buying and selling activities in the Indian capital market.
In summary, FIIs contribute to the global flow of capital and play a crucial role in shaping financial markets across borders.
Types of FIIs
1. Sovereign Wealth Funds (SWFs):
- Definition: SWFs are state-owned investment funds that are created using surplus reserves from national revenues, such as those generated from oil or other exports.
- Purpose: These funds aim to benefit the nation's economy and its citizens by investing in diverse assets globally to achieve long-term returns.
2. Foreign government agencies:
- Definition: These are entities or agents authorised by foreign governments to perform welfare and other services in another country.
- Role: They engage in various economic activities, including investments in foreign markets, contributing to international development and cooperation.
3. International multilateral organisations:
- Definition: These organisations consist of three or more countries collaborating to address common issues.
- Function: They play a vital role in managing global issues and ensuring coordinated relief efforts, with investments often focused on sustainable development and economic stability.
4. Foreign central banks:
- Definition: These are the main financial authorities of their respective countries, responsible for issuing currency and managing reserves.
- Activities: Foreign central banks engage in international investments and foreign exchange operations to manage their countries' monetary policies and economic health.
Who are DIIs?
Domestic Institutional Investors (DIIs)are financial entities that operate within a country’s borders and engage in investment activities using funds sourced from domestic investors.UnlikeForeign Institutional Investors (FIIs), who come from abroad, DIIs are local entities that manage and deploy funds within the domestic financial market.
Here are some key points about DIIs:
- Definition: DIIs include various institutional investors within a country, such as mutual funds, insurance companies, local pension funds, and banks. They play a crucial role in shaping the stock market and contribute to the overall liquidity and stability of the financial system.
- Investment focus: DIIs primarily invest in the financial instruments and securities of their own nation. For instance, Indian mutual funds investing in Indian company equities fall under the category of DIIs in the Indian stock market.
- Long-term perspective: DIIs tend to have a long-term investment horizon. Their actions can influence market trends and impact stock prices over extended periods.
- Regulatory framework: DIIs operate within the regulatory framework of the country where they are based. They must adhere to rules set by local regulatory bodies, such as the Securities and Exchange Board of India (SEBI) in India.
In summary, DIIs are essential participants in the domestic financial ecosystem, contributing to the growth and stability of the stock market.
Types of DIIs
1. Indian insurance companies:
- Definition: Insurance companies in India offer financial protection against various risks, such as critical illnesses or accidental deaths.
- Significance: Their growing importance in the financial sector is evident through their substantial investments in the equity and bond markets, contributing to economic stability and growth.
2. Indian mutual funds corporations:
- Definition: Mutual funds pool resources from individual investors to invest in a diversified portfolio of assets.
- Objective: They aim to achieve investment returns in line with the risk tolerance of their investors, providing a popular avenue for individuals to partake in the financial markets.
3. Indian banks and other financial institutions:
- Definition: These institutions include commercial banks and other entities that offer a variety of financial services such as loans, safe deposit lockers, and insurance products.
- Investment role: Profits generated from their services are often reinvested in the stock markets, playing a pivotal role in the domestic investment landscape.
What is FII vs. DII?
Aspect | FIIs (Foreign Institutional Investors) | DIIs (Domestic Institutional Investors) |
Definition | FIIs, or Foreign Institutional Investors, are investors from outside India who invest in the Indian stock market. | Domestic Institutional Investors, or DIIs, are investors based in India who invest in the Indian stock market. |
Types | FIIs include pension funds, mutual funds, investment trusts, banks, insurance companies, sovereign wealth funds, and more. | DIIs consist of mutual funds, insurance companies, local pension funds, and banks and financial institutions. |
Investment location | FIIs invest from outside the country where the investment is made. | DIIs invest within the same country where the investment occurs. |
Ownership restrictions | FIIs can invest up to 24% of the entire paid-in capital of a company. | DII ownership is not subject to such restrictions. |
Investment horizon | FIIs typically have a short to medium-term investment horizon. | DIIs tend to make long-term investments. |
Influence on stock market | FIIs’ actions can significantly impact stock prices and market liquidity. | DIIs play a crucial role in shaping the stock market, especially when FIIs are net sellers in the country. |
Registration and rules | FIIs must register with the Securities and Exchange Board of India (SEBI) and follow its regulations. | DIIs operate within the regulatory framework of the Indian financial system. |
Example ownership in the Nifty 500 | FIIs own approximately 21% of the companies in the Nifty 500 index. | DIIs hold around 14% of all shares in Nifty 500 companies. |
Remember that while FIIs and DIIs have distinct characteristics, both contribute to the overall dynamics of a country’s financial markets.
What types of FIIs vs. DIIs are allowed in India?
After covering FII and DII full forms and meanings, we move to assess what types of foreign and domestic institutional investors are allowed in India. Here is a quick overview.
FIIs allowed in India
- Pension funds
- Banks
- Foreign central banks
- Investment funds
- Mutual funds
- Insurance companies
- Foreign government agencies
- International multilateral organisations
- Sovereign wealth funds
This list also includes charitable trusts, charitable societies, university funds, endowments, and foundations registered with a statutory body in their country of incorporation with a 5-year record of operation.
DIIs allowed in India
- Indian mutual fund corporations
- Indian banks and other financial institutions
- Local pension funds
- Indian insurance companies
Conclusion
In summation, both FII and DII are institutional investors that differ in terms of where they are incorporated and where they choose to invest. As significant market participants, their inflows and outflows can inspire confidence or trigger panic among retail investors. Thus, tracking FII and DII trends and rationalising the same can help you assess market conditions, tweak your portfolio, and predict future trends.
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Frequently asked questions
Do FIIs and DIIs work in opposite ways?
Market analysis suggests that FIIs and DIIs do work in opposite ways. When FIIs sell, DIIs buy and vice versa. FIIs focus on short and medium-term gains from a bullish market, while DIIs buy and hold positions at lower prices during FII outflows.
Why is there an outflow by FIIs?
RBI responding to rising inflation levels, higher lending rates, strengthening of the US dollar, and changing global economic conditions can cause FII outflows. Government policies like stringent regulations can also cause FII outflows.
What are some recent initiatives taken by the government of India?
Here is a list of recent government initiatives that have helped boost investments in India.
- Allowing FDI investments up to 100% via the automatic route in certain sectors like telecom.
- Proposal for creating an Investment Clearance Cell (ICC) that will offer end-to-end support to investors under the National Single Window System.
- Extension of the Product Linked Incentive Scheme to 14 sectors to attract more foreign investments to India.
How do FII and DII affect the stock market?
Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs) significantly influence the Indian stock market. When FIIs invest heavily, it often leads to increased market liquidity, higher stock prices, and a positive market sentiment due to the influx of foreign capital. Conversely, large-scale selling by FIIs can lead to market downturns. DIIs, including mutual funds and insurance companies, help stabilise the market by counterbalancing FII activities. Their consistent investment can mitigate volatility, providing a cushion during periods of FII withdrawal.
How to analyse FII and DII data?
Analysing FII and DII data involves examining their trading patterns, net inflows or outflows, and sectoral investments. Look for trends in daily, weekly, and monthly data to understand their market stance. Tools like trading volumes, stock performance, and market indices can indicate the impact of their activities. Additionally, comparing the behaviour of FIIs and DIIs provides insights into market dynamics, as differing strategies between foreign and domestic investors can reveal broader economic sentiments and potential future market movements.
What happens when FII buys and DII sells?
When FIIs buy and DIIs sell, the market may experience heightened volatility. FII buying generally boosts market liquidity and drives up stock prices due to increased demand. However, if DIIs simultaneously sell, it can create a balancing effect, potentially moderating price increases and stabilising the market. The net impact depends on the magnitude of the transactions. If FII purchases outweigh DII sales significantly, the market is likely to rise. Conversely, if DII sales are substantial, it may limit the upward movement or even lead to market corrections.
What is the FII buying indicator?
An FII buying indicator refers to metrics or signals that suggest increased purchasing activity by Foreign Institutional Investors. Key indicators include a rise in the net inflow of foreign capital, increased trading volumes in specific stocks or sectors, and positive movement in major stock indices. Additionally, regulatory filings and reports showing FII holdings can serve as indicators. Market sentiment indicators, such as bullish trends in global markets and favourable economic policies, can also signal potential FII buying activity.
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