FIIs V/S DIIs - WHOM SHOULD YOU FOLLOW?
By Ruma Dubey
Foreign Institutional Investors (FIIs) are buyers while Domestic Institutional Investors (DIIs) are sellers and we the people, are mostly mute spectators!
Many are perplexed, trying to figure out this contrarian behavior of both these institutional investors. On 12th Feb, FIIs were net buyers to the tune of Rs.604 crore while DIIs, which includes Banks, domestic financial institutions, insurance and mutual funds were net sellers in the equity segment to the tune of Rs.412 crore.
Many are worried about this diabolical behavior of both. But actually, this is how they have historically almost always behaved. When FIIs are buyers then DIIs are sellers and when FIIs are sellers, then DIIs are buyers. So this time around too, they are both following their own set pattern.
But if we really do need to probe into the nitty-gritties of things, then we can look into what they are buying and selling, which could give us some understanding into their trading psyche or maybe their perception about the sectors.
As per a report put out by CMIE, in Q3FY13, DIIs have bought NMDC, Reliance Power, Cairn India, Infosys and United Spirits. DIIs sold HDFC Bank, M&M, L&T, Bajaj Auto and Axis Bank. On the other hand, FIIs were buying HDFC, HDFC Bank, IndusInd Bank and Axis Bank while they were selling Cairn India, DLF.
Edelweiss has also put out a similar report on institutional holding and its findings were completely baffling. FIIs were overweight on the financial sector, banking; in fact 41% of their funds went into the BFSI sector. The rest is distributed in autos, utilities, capital goods. They increased their inflows into the auto sector from 4% to 11%. They were underweight in FMCG, energy and IT.
And DIIs were the exact opposite. They are overweight in FMCG, energy and capital goods and they were underweight in BFSI and IT.
Thus the only thing common between DIIs and FIIs – both are underweight on IT.
FIIs are banking on the BFSI and auto sector probably seeing a revival, assuming that RBI will now consistently reduce interest rates. They probably think that the RBI and the US Fed work the same way. And DIIs, who are home bred, “locals” so to say, know better. They know that RBI is not really open to aggressive consistent rate cuts and it will take a while for the cycle to be reversed and that means that the auto sector has a long way to go. DIIs have been paring their stakes in cyclicals, mainly auto and are putting more money into materials rather than defensive stocks. And a comparison of the top 10 FII underweight list and the top 10 overweight list of DIIs shows that FIIs are buying stocks which the DIIs are selling and vice versa.
Probably as Warren Buffett has often pointed out, he calls this the “institutional imperative” where like a herd, they follow each other, even if they know it is not logical as they do not want to “miss out”; not having the guts to take contrarian calls. This is ditto for FIIs and as well as DIIs as both are following their own herds. And that also probably explains why mutual funds are not really fancied by Indian investors.
And we as independent, intelligent investors, do not have such peer pressures to follow any herd. So do not follow either the FII or the DII. Do your own home work and take a well informed decision. After all, you make your own destiny, not by blindly following the path of others.