What Market Balancing Act by Domestic Institutions Signals
iasparliament
December 03, 2021
What is the issue?
When global markets witnessed a sell-off last week and FPIs pulled out a net of Rs 30,255 crore, Domestic Institutional Investors (DIIs) counter-balanced this by emerging as net investors.
What led to this volatility?
Amid panic over the emergence of the Omicron variant of the coronavirus, equity markets witnessed a global sell-off.
The markets were already under pressure because of the continued surge of infections in Europe.
Their fall was also driven by anxiety that the US central bank may wrap up its stimulus programme and raise interest rates sooner than earlier expected.
As top-line companies came under intense selling pressure, the benchmark Sensex at BSE crashed by 4.24%, to close at a three-month low on Friday last week.
Over eight trading sessions, the FPIs pulled out a net of over Rs 30,000 crore, and they were net sellers on each of these days.
What are Domestic Institutional Investors (DIIs)?
Domestic institutional investors are those institutional investors which undertake investment in securities and other financial assets of the country they are based in.
The domestic institutional investors use pooled funds to trade in securities and assets of their country.
These investment decisions are influenced by various domestic economic as well as political trends.
The DIIs —mainly banks, insurance companies and mutual funds were net positive on each of these 8 trading sessions.
Domestic institutions follow the policy of ‘buy when others sell’ and they are long-term players and utilise every opportunity to get stocks cheap.
What does DII inflow indicates when FPIs are selling?
Continued investment by DIIs indicates that funds of retail investors are flowing into mutual funds and other market-related instrument.
It also indicates the confidence of retail investors in the economy and growth, especially with an additional boost coming from the festival season and pent-up demand.
Over the last 7 years, mutual funds have emerged as a strong domestic investment category and have often played a counterbalancing role when FPIs have been selling.
What is the source of DIIs’ funds?
Funds invested by DIIs are mostly from retail investors who contribute to various schemes of insurance companies and mutual funds.
The assets under management (AUM) of equity schemes touched Rs 12.96 lakh crore as October 2021.
There has been increase in number of demat accounts, mutual fund folios and number of SIPs.
Insurance companies are also major investors in the market and they invest on a long-term basis of 10-15 years.
LIC alone normally invests around Rs 50,000 crore every year.
How should retail investors view this?
Notable improvements in the economy were noted by the following indicators.
A sharp expansion in the manufacturing purchasing manufacturers; index (PMI) for November
Strong GDP growth data for the second quarter
High GST collections over the last 3-4 months
Low oil prices
When the market falls on global factors, it is a great opportunity for investments.
