Understanding FII and DII: How They Shape the Indian Stock Market 

In the stock markets, we can witness different types of investors; each of them plays a crucial role in impacting the dynamics of the market. The market is impacted by various types of investors, from institutional to retail. In this article, we will particularly focus on institutional investors, their types, like FII and DII, their roles, and how they impact the market. 

But before that, let’s take a brief look at what institutional investors are and how they differ from retail investors. 

Understanding institutional investors

A business or organisation that employs people to make investments on behalf of others—usually other businesses and organisations—is considered an institutional investor. The objectives of the businesses or organisations that institutional investors represent determine how they will distribute the funds to be invested. Banks, insurance companies, mutual funds, hedge funds, and pension funds are a few well-known categories of institutional investors.

Where institutional investors differ from retail investors is the rate at which they each trade along with the volume. Apart from that, the costs associated with investing, their knowledge and experience in investing, and their access to significant investment research are, in general, the key distinctions between institutional and retail investors.

Who are Foreign Institutional Investors (FIIs)?

As we can guess from the name, foreign institutional investors, or FIIs, are those investors who invest in the stock market of a foreign country. If an institutional investor from the UK invests in the Indian equity market, they will be called Foreign Institutional Investors. In short, FIIs bring funds from a foreign country and invest in another country if they see growth potential. 

FIIs are not individual investors and can be referred to as Foreign Portfolio Investors (FPI). They can be foreign mutual funds and foreign insurance companies, to name a few. In India, some of the FIIs are the Government of Singapore, the Euro-Pacific Growth Fund, and more. 

Who are Domestic Institutional Investors (DIIs)?

Unlike FIIs, DIIs or Domestic Institutional Investors are institutional investors who invest in the stock market of their own country. They are the local entities that invest in the domestic market, i.e., domestic companies, government securities, and others. 

Under DIIs, we have insurance companies, mutual funds, pension funds, banks, and other financial institutions. In India, some of the DIIs are HDFC Mutual Fund, SBI Mutual Fund, and Nippon Mutual Fund, to mention a few.

Also read: Full-Service vs. Discount Brokers in India

How are FIIs and DIIs different?

	Foreign Institutional Investors	Domestic Institutional Investors
Investor types	Global investment firms, overseas pension plans	Domestic financial institutions, local pension schemes, mutual funds
Investment goals	Global portfolio diversification, seeking high-growth markets	Supporting national economic development
Time Frame	A mix of short- and long-term approaches	Generally favouring extended holding periods
Capital Source	Overseas funding	Domestic savings and investments
Regulatory Framework	Overseen by the host nation’s financial regulators	Governed by national financial authorities
Market Volatility Response	May amplify market swings	Often acts as a stabilising force

How do FIIs and DIIs activities impact the stock market?

• Liquidity factor 

In the financial markets, FIIs and DIIs may influence the market significantly by actively taking part in them. This encourages a steady flow of funds and helps bridge the gaps in the market. However, FIIs usually contribute more than DIIs. This is because FIIs focus more on trading, whereas DIIs are more investment-orientated. 

• Growth in the economy

The contribution of FIIs and DIIs activities goes beyond balancing the liquidity of the market. They also influence the overall economy and emerging markets. They also impact underrated sectors in an economy. You can easily track their activity on NSE as well.

Below we can see the FII and DII data on NSE today (As of August 22, 2024).

Despite having distinct investing styles, they are still mutually dependent. They are essential to the expansion of the Indian economy overall and the stock market in particular. They provide investor confidence, liquidity, and internal market stability, preserving a sound market environment that strengthens the foundation of the economy. 

• Influencing market trends

The Indian stock market is driven by two entities, namely DIIs and FIIs. Without one, the stock market would not be able to operate. They influence the behaviours and patterns of the market.

A market rise is indicated when FIIs are bullish and inject capital into the system. On the other hand, extensive selling points to a declining tendency. DIIs provide a buffer against volatility brought on by FIIs. They could keep making stock market investments, avoiding a financial disaster.

• Market Stability

Because they are impacted by distinct variables, FII and DII may move in opposing directions. There is a correlation observed between the rise in FIIs and the fall in DIIs.

In the Indian stock market, FIIs are often sellers, while DIIs are typically buying. When they anticipate poor market circumstances, FIIs typically sell their holdings and make short- and medium-term investments. By making long-term investments in a variety of asset types at lower prices, DIIs are crucial in balancing the market during this period and restoring investor trust in the stock market. As a result, DIIs are seen as purchasers who support the stability of the market.

Also read: Stock Market Index in India

Bottom Line

The way that FII and DII today behave is crucial in determining how stock markets are shaped. For investors such as yourself, it is essential to comprehend their responsibilities, objectives, and the consequences of their activities.