As FII holdings plummet to 10-year low, DIIs, retail investors keep share market afloat

During August-October, foreign investors have sold a net worth of Rs 76,369 crore.

FII holdings hit a decadal low in November 2023, as foreign investors exited their Indian holdings en masse during the months of August, September, and October. However, equity markets have remained buoyed due to buying from DIIs and retail investors. Domestic investors have pumped around $20 billion into equity markets so far this year, successfully offsetting the selling from foreign investors.

Of the domestic investors, mutual funds have contributed around $17 billion, as SIP inflows continue to rise structurally despite extreme volatility -- reaching north of $2 billion per month.

In the wake of foreign investors exiting, the aggregate holdings of FIIs stand at Rs 54.5 trillion or 16.6 percent of overall Indian equities as of November 2023; this is the lowest since 2012, said ICICI Securities in a report.

During August-October, foreign investors have sold a net worth of Rs 76,369 crore in equities, while domestic investors have bought a net worth of Rs 70,435 crore. Despite the relentless selling from FIIs, the domestic benchmark Nifty 50 has gained 1.7 percent since August, instead of succumbing to selling pressure.

The contrast with other emerging markets is stark, as shown by one of the world’s largest emerging markets. China’s frontline index, the Shanghai Composite, has plummeted more than six percent over the past six months as foreign investors pull out of the country.

As the US Treasury yields jumped to nearly five percent, and the dollar index surged, FII exited their holdings in India and other emerging markets to take advantage of the risk-free premiums that the US bonds and greenback offered.

ICICI Securities also said that the underperformance of FIIs was a result of their portfolio orientation. FIIs maintained an overweight position in high-quality relatively expensive financial stocks, which underperformed over the year. “Also, the sharp outperformance of mid, small and microcaps where FPIs have lesser holdings has resulted in a dip in their holdings of overall Indian equities,” added the report.

The pandemic brought a fresh wave of retail investors to the market, who played a significant role in supporting the Indian market, particularly in recent months, said Mayank Mehraa, principal partner, Craving Alpha.

“The share of total volume contributed by retail investors is in continuous uptrend and this seems to be permanent rather than temporary,” added Mukesh Kochar, national head of wealth, AUM Capital.

These investors have shown a particular interest in mid-cap and small-cap stocks, which offer the potential for higher returns. This also led to increased portfolio diversification, which gave the investors higher returns as mid-cap and small-cap scrips outperformed this year.

The consistency of SIPs and pension fund money has brought around Rs 45,000 crore of fresh money per month into the system, per Abhishek Jain, head of research, Arihant Capital Market.

The investment rationale for FIIs is different as well. Foreign investors are primarily focused on short-term profits, react to market volatility, and look towards global news for cues. Unlike foreign investors, domestic institutional investors - including mutual funds, pension funds, and insurance companies - maintain a long-term investment outlook, said Mehraa.

DIIs build their positions gradually and also exit gradually. On the other hand, the FPIs’ stance is that of buying and selling in bulk, especially in sectors where liquidity is deep, said Mukesh Kochar. As a result, DIIs do not react to volatility or market cues on an immediate basis, but remain invested. During market downturns, they use the opportunity to enter quality counters at decent valuations.

Since ‘hot money’ is exiting Indian markets, DIIs have taken a more cautious, stock-specific approach. The trend for domestic investors currently is to lean towards sectors that promise stability and growth in uncertain times, said Jain.

Healthcare, private banks and auto sectors have seen the highest mutual fund inflows last month, with multi-cap and mid-cap funds receiving the highest flows across fund sizes, according to ICICI Securities.

Mukesh Kochar said, “DIIs are betting heavily on BFSI, auto and auto ancillary, along with sectors related to economic recovery. Of late, they have started building positions in IT stocks as well.”

There are some signs that the trend of declining FII investments in India may be reversing. For example, FII inflows have increased in recent days, said Mayank Mehraa, adding, “However, it is too early to say for sure whether this is a temporary trend or a sign of a more sustained recovery.”

Nevertheless, the long-term prospects for the Indian market remain strong, driven by the country's economic growth potential and its large and growing consumer base.