DIIs Hold More Power Today

About 10-15 years back, I remember that our markets were dependent on foreign institutional investor (FII) money. The markets would go up if they pumped in the funds and would go into a tailspin if they decided to pull out.  We would actually track their fund flow patterns to predict the movements in our markets. The FII money was also called “Hot Money” and consisted mostly of foreign hedge funds, emerging market funds and others. The fund managers of such funds would keep searching for greener pastures to put their money in the markets worldwide. Such funds had no qualms in investing in those markets which were comparatively performing better and pulling out of our markets at the drop of their hats. Resultant? our markets would stay depressed until the FIIs magnanimously decided to come back. In other words, we were held hostage by these FIIs as our domestic institutional investors (DII)s were a weak force to reckon with and their movements had negligible or no impact on our stock markets. These FIIs had no desire to invest in the growth stories of any economy and were only interested in profits.

The scenario has changed to a large extent today. Our DIIs have become powerful and despite the FIIs pumping out money in the last few months, our markets had the resilience to withstand the fluctuations created by their exit. Yes, there are effects of FIIs moving out like the dollar rates have gone up (not the only reason) and the bourses have seen some volatility of late. But no major impact was seen as a lot of shock in the markets have been absorbed and cushioned by strong inflows from our DIIs especially mutual funds, provident funds and insurance sectors. Unlike the FIIs, the DIIs are here to stay and do not have the flexibility to explore the global markets (yet). They are investors and are interested in the Indian growth story. To understand that how much our mutual fund industry has grown in the last five years, consider this—the total mutual funds asset size was `8.34 trillion in October 2013, and in October 2018, it was `22.24 trillion. Nifty 50 levels, meanwhile, were around 6100 points on October 2013 and now, it is around 10,500 points. This proves that while Nifty 50 has not doubled in the last five years, the asset size in the mutual funds has nearly tripled. This has made the DIIs strong and most importantly the money is here to stay. Slowly but surely the domestic investors are waking up to the fact that the Indian economy is growing and resilient and the FIIs in the future might not hold a sway in the markets. 

I will conclude by citing my observation about the current market scenario of late. The public at large is predicting a doomsday regarding the  present market trends and is depressed citing various factors which may affect us in the coming few months, namely state elections, general elections, price hike of crude oil and current account deficit (CAD).

However, I would like to request all the naysayers to ponder over the reality rather than echo the common market sentiments. Which sector other than a few PSUs will be affected by the outcome of the state and general elections? The price in the international markets of crude oil is steadily coming down. As the price of the crude comes down our CAD situation will also improve. The Indian consumption story remains intact and infrastructure spending is slowly picking up.

 Our markets are very emotional and sentiment driven. Hence, even if we do not understand the impact of certain factors we are pessimistic. At such times, I request to you dear readers to remember that we have an investment goal and have invested for a long term, hence these intermittent volatilities really do not matter.

Happy Investing! 

The author is a wealth advisor and Founder, Tangerine Ideas