You thought DIIs outsmarting FIIs on D-St? Here is a reality check

By Bhavana Acharya

With Rs 27,673 crore investments in equities last month, domestic mutual funds reflected growing clout on Dalal Street. Including insurance companies, domestic institutional investors pumped in Rs 60,188 crore in April alone.

While mutual funds are definitely gaining clout, they are far from matching the might of foreign institutional flows. The comfort is that they are increasing helping support the market and cushion falls, and they have been buying stocks at lower prices in every dip.

MFs still hold a small part of the market
Their share in the free-float market capitalisation has not risen significantly in the past two years despite record inflows. From holding 8 per cent of the free-float market-cap in 2014, mutual funds today hold 10 per cent of the market. Including insurance companies, DII holding in the market is still only half that of FIIs. FIIs hold close to 40 per cent of the free float market, only slightly down from the 41 per cent that they held three years back.
Their buying and selling, thus, has a far greater impact on the market. Direct stock holding by individual investors is, in fact, higher than what mutual funds hold. Since this holding is spread over a vast number of investors, their buying and selling volumes do not match that of institutional investors.



Markets respond more to FII moves
Huge inflows and outflows from FIIs more or less correspond with market gains and corrections, despite strong mutual fund activity. In November 2016, for instance, when FIIs had a net outflow of Rs 19,982 crore, DIIs saw a net inflow of Rs 18,277 crore. The broader BSE500 index still fell 6 per cent for the month, while the Sensex lost 5 per cent. The drop continued into the next month, even as net flows from mutual funds rose 11 per cent during that month.

A similar story played out in early 2016 and in mid-2016.

The stock market, thus, tracks FII movement much more closely and is more likely to dance to their tune than that of mutual funds.


(​ Monthwise net flows of FIIs and DIIs in rupee crore, against Sensex returns)

Equity outflows are also strong
Though flows to equity funds have been buoyant, outflows are also surging. Equity fund outflows rose 65 per cent in 2016-17, against 39 per cent growth in inflows. The outflow trends suggest investors are apt in pulling out when they feel the market is on a high and profit booking is the sensible thing to do, or when the market tanks.

For example, outflows surged in March 2015 and again a year later, in mid-2016 and late 2016. As a result, while inflows kept coming in, funds have to meet redemption requests as well. The ratio between inflows and outflows has been deteriorating from mid-2015 onwards. If it continues, it can undermine mutual fund ability to counter foreign flows.

DII support for the market
The comfort is that while mutual funds may not be market movers, they do well in shoring up the market when FIIs head for exit. Market falls could have been steeper if persistent buying by domestic institutions had not absorbed the FII selling.

Their buying, for example, helped the market post gains in January and February 2017 until FIIs came back with a bang in March 2017. Even better, DII and FII activities are frequently at odds as can be seen in the graph above. So, when FIIs sell and the market drops, mutual funds buy. Thus, MFs invest more when stocks are cheaper and less when they are expensive.

(Bhavana Acharya is a Mutual Funds Analyst at FundsIndia.com. Views expressed in this column are her own and do not represent those of ETMarkets.com)