The actions taken by traders and investors in a stock market are combined to form a comprehensive market. If you have invested in stocks, you may have heard that different types of investors exist. Retail investors, high-net-worth people, domestic institutional investors, and international institutional investors are some categories that fall under this umbrella. Every investor who participates in equities markets is placed into one of these classes according to the total amount of money they invest. Individuals who invest in the share market are called retail investors. However, institutional investors are the primary drivers of most of the activity in the stock market.
Mutual funds, hedge funds, insurance firms, and pension funds are all examples of investments that institutional investors hold. On the other hand, they can be further divided into FIIs and DIIs. Do you know what FII and DII are in the share market? If not, then let's discuss it in depth while providing some examples.
Let's first figure out who Institutional Investors are:
Institutional investors are those that collect funds from a large number of individuals or organizations to buy a wide range of financial assets. Because institutional investors frequently purchase and sell massive blocks of stocks, bonds, or other securities, they are often referred to as the whales of the share market. Institutional investors can be classified as either FII or DII. FII full form is Foreign Institutional Investors ( FIIs), and DII full form is Domestic Institutional Investors (DIIs).
Who are FIIs?
Foreign Institutional Investors are investors who are investing in India but are not a part of India. These investors are referred to as FIIs. They can be mutual funds or insurance businesses from any country. It has the potential to contribute to the expansion of our economy.
Foreign institutional investors must register with SEBI and abide by its requirements because they are not Indian companies. FIIs are sometimes referred to as FPIs (Foreign Portfolio Investors). Foreign direct investments (FIIs) have the potential to make or lose a significant amount of money due to changes in currency values.
Examples - J.P. Morgan, Euro pacific growth fund, Morgan Stanley.
Limits on Foreign Institutional Investors or FIIs in Indian Stock
1. FIIs can invest up to 10 percent of their total capital into a single company's equity.
2. The maximum amount foreign institutional investors (FIIs) are allowed to invest in public sector banks is 20% of the bank's paid-up capital.
3. Foreign institutional investors (FIIs) can only invest up to 24% of an Indian company's paid-in capital.
4. The maximum threshold can be lifted to 30% if the individual corporations receive permission from their shareholders.
Who are DIIs?
Domestic Institutional Investors are Indian investors who want to profit by putting their money in the Indian stock market. DIIs can put capital in insurance companies, mutual funds, liquid funds, and other investments. Both political and economic dynamics influence these investment decisions of DIIs. Domestic institutional investors (DII) have the same potential to affect the economy's net investment flows as Foreign Institutional Investors (FIIs) do.
In India, domestic institutional investors play a big part in how the stock market performs, notably when foreign institutional investors are the net sellers in the country. The amount of money invested in the Indian stock market by domestic institutional investors (DIIs) has surpassed the benchmark of Rs. 2 trillion rupees so far in 2022.
For example - In India, the Life Insurance Corporation is the most prominent domestic institutional investor (DII).
Some more list of DII in India -
1. ICICI Prudential
2. Nippon AMC
3. HDFC Life
However, what are the significant distinctions between FIIs vs. DIIs, why FII and DII are opposite, and why is the existence of these two types of investors beneficial to India?
FII vs. DII
1. Location or Headquarters - The major distinction between FIIs and DIIs is the investor's residence. Foreign institutional investors (FIIs) are not from the same country in which the investment is made. Domestic Institutional Investors (DIIs) are from the same country where the investment is made.
2. Limitations on the total amount of investment - FIIS can only invest up to 24 percent of the total amount of the company's paid-in capital. There is no such constraint placed on the ownership of DIIs.
3. Research teams - Since FIIs are not natives of the country where they are investing, they must undertake additional and more in-depth analyses before making any investments. In other words, they require a more powerful R&D and research staff than the DIIs. But because of this better research, investors are putting more faith in FIIs investments.
4. Stock market holdings - FIIs hold approximately 21 percent of the overall holdings in the companies that make up the Nifty 500. On the other hand, DIIs hold about 14 percent of all shares in the Nifty 500 companies.
5. Investing style - Foreign institutional investors (FIIs) invest with a focus on the short to medium term. Domestic Institutional Investors (DIIs) invest mainly for the long term.
What Types of FII vs. DIIs are allowed in India?
The following are the different types of foreign institutional investors (FIIs) and domestic institutional investors (DIIs) list of in India:
Domestic institutional investors (DIIs) -
● Indian Insurance Companies - In India, the significance of insurance firms has significantly increased during the past few decades. They offer financial safety in case of a fatal illness or accidental death. For example - Bajaj Allianz Life Insurance and Max Life Insurance.
● Indian banks and other Indian financial entities - Loans, lockers, and various kinds of insurance are among the items they offer. The profits generated from these assets are then placed in the equity markets. Examples include HDFC Bank, SBI, and Kotak Mahindra Bank.
● Indian Mutual Funds Companies - One of the most common financial vehicles used for investing is the mutual fund, which is widespread in India. They then invest the combined capital in desirable assets, considering the individual investors' comfort levels with risk. Examples include ICICI Prudential Mutual Fund, Tata Mutual Fund, etc.
For Foreign Institutional Investors (FIIs) -
● Foreign Government Agencies - Foreign Agency means the foreign entity, organization, or agent allowed by the foreign country's laws to provide welfare services. For example - United States Agency for International Development
● Foreign Central Banks - A foreign central bank is a bank that, by law or government permission, is the leading authority other than the government that issues instruments meant to be used as currency. A central bank is a financial organization that acts as the depository for the nation's currency reserves. For example - the European Central Bank, Bank of Japan, Bank of England
● Sovereign Wealth funds - Simply put, a sovereign wealth fund is an investment fund controlled by the state and funded by the government, typically through the sale of surplus reserves. The economy of a nation and its residents both stand to benefit from the establishment of SWFs. An SWF may obtain its capital from a vast number of different sources. For Example - Korea Investment Corporation(KIC) and Taiwan National Stabilization Fund (TNSF).
● International Multilateral Companies - Multilateral organizations are formed when three or more countries band together to work on topics that are important to each of them. They ensure that everyone has a say in the management of global affairs while also ensuring that any relief efforts that are carried out are legitimate. For example - Global Environment Facility (GEF), European Bank for Reconstruction and Development (EBRD)
Institutional investors like FIIs and DIIs differ based on their country and where they invest. Both are essential market participants who significantly impact the market through their actions. If you keep track of how FII and DII affect the stock market, you might be able to predict future market trends. Before making investment decisions based on these numbers, you need to figure out the reason for their actions.
Q. Do FIIs and DIIs work in opposite ways?
Why FII and DII are opposite is because of their diverse array of parameters. The FII is looking for chances on a global scale, whereas the DII is looking for prospects within the country. Both pursuits will constantly look to put their money into businesses that are making progress.
Q. Why is there an outflow by FIIs?
There are several reasons for this, such as the dollar growing stronger, inflation going up, interest rates going up, the new Covid-19 causing supply problems, and less liquidity.