Common mix-up among investors over FDI and FII: Nirmal Bang
Foreign Institutional Investors (FIIs) are entities such as mutual funds, banks and insurance companies, among others, that are from or registered in a country outside of the one in which they are currently investing.
September 29, 2012 / 15:04 IST
No discussion about the stock markets is complete without the mention of FIIs or Foreign Institutional Investors. Any action by FIIs can cause heavy movements in the stock markets.
Who are FIIs?Foreign Institutional Investors (FIIs) are entities such as mutual funds, banks and insurance companies, among others, that are from or registered in a country outside of the one in which they are currently investing. FII is a term, which is commonly used in India to refer to international companies investing in financial markets here.For example: An insurance company which is registered in the United Kingdom and invests in shares listed in the Indian stock market, is an FII for the stock market in India.The FIIs were allowed to operate in the Indian capital markets only a couple of decades ago. In fact the opening up of our markets to FIIs is viewed as a turning point in the history of our stock markets.Within a short span of time, investments by FIIs in our markets have jumped multifold, to an extent that investments worth billions of dollars are made every year by them.The main reasons for FIIs flocking to our markets are strong economic growth, transparent regulatory systems, strong fundamentals of companies, robust banking system as well as progressive tax reforms, among others.Difference between FII and FDIThere is a common mix-up among investors over Foreign Direct Investment (FDI) and FII.However, remember that these two entities are entirely different from each other and cannot be used interchangeably. While FDI means foreign entities investing directly in companies based in other country or countries, FIIs on the other hand, invest in listed shares of companies in other countries.An FDI investment in a company is viewed more positively because it invests directly in the company as opposed to FIIs who enter through the secondary market. Unlike FDI, FII investments are viewed with scepticism because they enter and exit the shares more frequently as and when they have a profit opportunity or at the first sign of trouble. Pros and Cons of FIIsLike everything else, FIIs too come with their own set of pros and cons. Let us understand what they are: Pros of FIIsSince foreign institutional investors invest huge sums of money in the market, they do not do so blindly. The FIIs are huge financial institutions with expert professionals and analysts who research each and every stock thoroughly before investing. Therefore, if FIIs are buying, they serve as a benchmark and a yardstick by which domestic institutions and retail investors measure their investment prospects of a particular stock of a company.Cons of FIIsFIIs exit their holdings and get out at the very first sign of trouble. They also leave if their investment objective has been achieved. Since the volume of this investment is huge, it can lead to a sudden crash. This is why FIIs are often called as ‘hot money’. They can leave the country at the same speed as they came in.FIIs enter and exit the markets at a frantic pace, which leads to huge volatility and price swings. And while the long-term domestic retail investor does not have much to worry about such developments, it is the short-term retail investors such as intraday players or speculators who are often caught on the wrong side of the trade.Source: Nirmal Bang's Beyond MarketClick here to read the full magazineDisclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
