FIIs and DIIs are important stakeholders in the market and have a significant impact on liquidity and stability. In contrast to FIIs’ investment of ₹1.76 lakh crores, DIIs purchased shares valued at ₹1.85 lakh crores in 2023. Thus, it is important to appreciate the two classes of institutional investors if one is to navigate the complex structure of the stock market.
The Role of FIIs and DIIs
Foreign institutional investors are foreigners who invest in securities in India. This includes foreign pension and mutual funds, as well as hedge funds. Global factors like the economy, interest rates, and international relations usually dictate their investment decisions. FIIs tend to trade within a period of a few months, leading to enhanced volatility in the markets due to their frequent buying and selling.
DIIs, on the other hand, are local institutions like mutual funds, insurance companies, and pension funds that pour their funds into the Indian market. Their investment method is more about purchasing the company’s stock for a buy-and-hold period. This long-term view also helps DIIs stabilise the markets, especially when there is high volatility caused by the FII activities that have a short-term perspective.
Market Liquidity
Liquidity is a measure of the ease with which assets can be purchased or sold in the marketplace without causing a movement in their worth. Both FII DII bring in market liquidity in different ways. FIIs, in fact, mobilise considerable funds into the market, thus making liquidity in the market better and facilitating faster transactions. Their presence in the market usually means more investors are put into trade, making it easier for other investors to enter or exit positions.
DIIs, on the other hand, will attract less volume activity but are indispensable since they maintain liquidity during tricky market conditions. Where FIIs pull out more funds, for instance, DII can step in and buy stocks which will not make the prices fall too much. This is very important because it helps to avoid situations when all the investors leave the market; thus, excess volatility in the market will not occur.
Market Stability
There is little doubt that the performance of the financial markets depends greatly on the FII DII activity. On the one hand, FIIs are useful for market development but bring with them disorder due to their behaviour patterns and quick reactions to external info. For example, when global markets witness negative news, FIIs tend to go to the extent of offloading their positions in Indian equities, and this results in heavy price erosion.
The advantage, however, is that, in most cases, DIIs help offset this volatility. When evaluating the markets, they would stick to longer time frames and don’t succumb to the daily market noise.
Behavioural Dynamics
It is also possible to attribute herding behaviour within the FII and DII groups as well. It is common for FIIs to follow the trend too far, which causes a phenomenon known as positive feedback trading, where they keep buying when prices are on the uptrend and keep selling when downturns happen. Such behaviour can amplify the price movements in the markets, thus creating cycles of boom and bust.
On the other hand, it is observed that DIIs are usually less aggressive in terms of their investment strategy. Most of their investment actions are backed up by rigorous studies. Therefore, such patterns are usually less volatile. This difference in behaviour contributes to the overall dynamics of the markets, where FIIs drive short-term trends, and DIIs restore order.
Wrapping Up
The market liquidity and stability are highly driven by the FII DII data. It is worth noting that while FIIs increase liquidity by actively trading and making huge capital inflows, DIIs, on their part, help sustain the market as a consequence of their long-term holding strategies.
As for investors who want to get all the help they can get to make a more informed decision, Research 360 from Motilal Oswal is an all-in-one market research tool. This remarkable stock screener app would assist you in every possible way to review markets and predictions, seek and discover opportunities, and carry on successful investments in the market.
