Should you fret when foreign investors dump Indian equities?

Retail investors fret when sustained selling by institutional investors, especially foreign institutional investors (FIIs), makes news. In fact, FIIs have been selling in India for a few months now.

However, buying by domestic institutional investors (DIIs) have been balancing the market. Since both institutional selling and buying are seen as actions by informed investors, what should the retail investor do?

How much have they sold and bought?

FIIs have been selling constantly from the beginning of the financial year. Till March 15, 2022, they have sold stocks worth Rs 1.4 lakh crore. Over the same period, DIIs have bought stocks worth Rs 2.1 lakh crore.

DIIs are deploying the money invested in them by domestic and retail investors who believe Indian equities would go higher in future. Globally, however, things are not so rosy as interest rates are going to go up on the back of fears of rising inflation.

According to the Global Fund Manager Survey by BofA Securities, published on March 15, the cash levels maintained by fund managers are at the highest since April 2020 and the growth optimism is at the lowest since July 2008. So, FII selling should come as no surprise.

Are their actions important?

According to a March 10 Bank of Baroda report (Do FPIs drive the market), “over the last eight years, there has been a strong positive correlation (0.6) between foreign portfolio investments (FPIs) and equity flows and returns on the BSE Sensex".

Put simply, when the monthly data denotes FII investments coming into India, the market is more likely to go up. However, it is not the case with mutual fund flows. There is a negative 0.5 correlation between mutual fund flows and the BSE Sensex. This shows that mutual fund flows are not a reliable driver of Sensex returns.

There are many factors like interest rate hikes, the Russia-Ukraine war and rising commodity prices behind the wide swings in the stock market. Information flow keeps changing almost every day, leading to big and quick moves in stock prices. Relying on external factors such as institutional investors’ actions make no sense.

Institutional investors often take decisions based on the relative attractiveness of each asset class. They may have access to markets and asset classes retail investors may not have. You are better off assessing the investment options you have.

The way out for retail investors

“Our frontline stock indices are fairly valued. There are a few pockets of equity markets that are available at attractive valuations. Investors should remember that the best returns are generated when money is deployed in the most volatile phases of the markets,” says Anup Bhaiya, Managing Director, Money Honey Financial Services.

Staggered investments through well-managed diversified equity funds can offer healthy risk-adjusted returns over the next 3-5 years, he says.

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Institutional investors may also decide to buy or sell, depending on the money flow they have. Their investment strategy and outcomes may not be the same as yours. “There are various reasons for institutional investors to sell, including end-of-year profit-booking, product or strategy maturities, change in allocations to various geographies and change in relative risk perception. These may not have any bearing on the quality and valuations of our stocks. Reading too much into their actions and trying to copy them may lead to unnecessary churn in the portfolio, leading to anaemic returns,” says Vinayak Savanur, Founder and CIO at Sukhanidhi Investment Advisors.

Ignore the FIIs

Instead of looking outward for investment decisions, it is better to look inward. You do not have control over how stock prices change, nor can you predict the macro economic situation. It is better to be in charge of your actions and emotions, experts say.

“Define your financial goal and use equity to fund long-term goals. Ignore the noise in the market,” says Abhay Mathure, a Mumbai-based mutual fund distributor.

Investing in equity mutual funds through systematic investment plans is half the work done. The other half is to stay put in turbulent times, he adds.

Make the most of the volatile times by investing in diversified equity funds to ensure that your long-term financial goals are achieved well ahead of the deadline.