How FII moves hurt your your MF portfolio

Over the last month or so, foreign portfolio investors (FPIs) and foreign institutional investors (FIIs) have been net sellers (sold more than purchased) in the Indian markets. In March, foreign investors (FIs) have so far sold equity worth Rs 59388 crore and debt amounting to Rs 55175 crore. This has decimated many portfolios. The Nifty 50 lost nearly 23 per cent between February 26 and March 26. Fixed income investors too lose out on their investments in bond funds, as bond yields rise. Rising bond yields lead to mark-to-market losses, which in turn hurt net asset values. Equity mutual funds across categories, including those investing in stocks with high FII holdings, lost 20-30 per cent within a month.

So, whether you are an equity scheme or a debt fund investor, FIIs can influence the returns of your holdings significantly.

Why are FII selling?

When the COVID-19 pandemic initially struck, it was assumed that only China was affected. Being the engine for world growth, FIIs and FPIs may have sold off there anticipating slower growth there. But as the disease spread to almost every continent and country over February and March, including to India, FIIs and FPIs sold massively, anticipating a recession. Additionally, the domestic lockdown from the third week of March added to the woes of an already weak Indian economy.

For FIs with investments in India, the problem does not end there. In such times, there is a tendency to exit emerging markets and go for safer options such as the US dollar. That means the INR may depreciate and further reduce returns for foreign investors. Hence, in a hurry, the foreign investors pressed the ‘sell button’. The intensity in the selling was massive, at levels not witnessed in the last 10 years.

How do FII actions impact markets?

Foreign investors’ participation was one of the factors that ensured that Indian stock markets did well from 2003 to 2007. The strength of foreign money was visible in 2008. In that year, FIs sold stocks worth Rs 52987 crore in India. Nifty 50 lost 51.7 per cent. Domestic institutional investors bought shares worth Rs 11771 in that year.

FIIs may be dominant participants in Indian financial markets. But domestic institutions too have been deploying larger sums. Indian mutual fund have been receiving upwards of Rs 8000 crore every month through the SIP route. The formalisation of the economy and moves such as demonetisation have meant that financial assets are preferred investments for investors vis-à-vis gold and real estate. Over the last few months DIIs deployments have somewhat been balancing FIIs outflows with consistent investments.

As with all investment cases, FIIs' interest in India will depend on how soon the country’s economy revives and the COVID-19 pandemic abates, apart from of course the fundamentals of domestic companies.