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FY21 report card: FIIs pour highest-ever funds into equities, but DIIs emerge as sellers

Domestic institutional investors (DIIs) were net sellers of Indian equity in FY21 for first time in 5 years, according to Motilal Oswal Financial Services. Read on to why the contrast and will the trend continue in FY22

April 06, 2021 / 12:58 PM IST

The financial year 2021 (FY21) proved to be a year of stellar gains for Indian equities even as COVID-19 continued to pose a serious threat throughout the year.

Equities showed exemplary resilience in the year gone by as governments and major central banks of the world came out together to keep the economy up and running in times of pandemic.

The collective efforts bore fruit as the Indian equities ended among the top-performing markets of the world in FY21.

Benchmarks - Sensex and Nifty jumped 68 percent and 71 percent, respectively, during the year while the BSE Midcap gained 91 percent and the smallcap index surged 115 percent.

Read more: FY21 review| Benchmarks jump up to 71%, mid, smallcaps outperform

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One of the remarkable takeaways from the market's performance in FY21 was the contrasting trend of foreign institutional investors (FIIs) and domestic institutional investors (DIIs).

As pointed by brokerage firm Motilal Oswal Financial Services, FII flows in equities in FY21 were the highest ever at $37.6 billion, while DII saw net outflows after five consecutive years of inflows.

In the cash segment, FIIs were sellers only in two months - April and September 2020 - in the last financial year.

On the flip side, DIIs have been net sellers in eight months - April, July, August, October, November, December, January and February - in FY21, data available with Moneycontrol showed.

Track FII, DII trend here

Why this contrast?

Indian market started to witness foreign fund inflows after interest rates were lowered in the wake of the pandemic and investors started to anticipate economic growth.

"Global liquidity and India’s sharp recovery are two reasons for higher FII flows into India. Globally, investors have been willing to pay a premium for Indian equities as valuation benchmarks have risen across major markets," Rusmik Oza, Executive Vice President & Head of Fundamental Research at Kotak Securities pointed out.

"In case of DIIs, there has been redemption pressure from local investors. There could be multiple reasons for the outflows from mutual funds which has led to consistent selling by DIIs. We have seen many existing and new investors preferring the direct equities route over mutual funds which could also be one of the reasons for DIIs not getting the desired flows," Oza said.

After the outbreak of the coronavirus pandemic, emerging markets appeared to be an attractive destination for value buying due to rate cuts by central banks across the globe which led to the flow of FIIs.

Will the trend persist?

At this juncture, it looks difficult to foresee if the market will repeat the trends of FY21 in FY22, too.

In FY21, mid-caps and small-caps outperformed the benchmarks and it is going to be difficult to see such repeat performance in FY22.

"The one-sided move could have been one reason for the active funds not being able to generate alpha over the benchmarks," Oza said.

"Going forward, if we see consolidation and rangebound market in FY22 then mutual funds could be able to deliver alpha. Also, if we see intermittent corrections in FY22 then we can expect DIIs to be active buyers in declines," Oza said.

Oza expects DII flows to turn positive in FY22 and at the same time FPI flows could also remain on the positive side.

Gaurav Garg, Head of Research at CapitalVia Global Research believes inflows might be higher in FY22 but not to the extent of what we have witnessed in FY21.

"FY21 was the year of huge volatility, however, now the markets are more stable and mature, so the momentum might be slow but will be positive. Talking about DIIs, I expect they might be more aggressive in this financial year," said Garg.

The long-term trend of the market is positive and with economic recovery picking pace and widespread vaccination, the market is expected to scale fresh peaks in FY22.

Disclaimer: The views and investment tips expressed by investment experts 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.
Nishant Kumar
first published: Apr 6, 2021 12:58 pm

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