India has been the most liked investment destination for FIIs and also FIIs were net buyers in Indian equity trading markets to the tune of Rs 17 lakh crore in 2020, reduced stake in over 40 large-cap companies sequentially in the quarter ended in December.
Since 2012, banks have remained the investment choice for FIIs. In the last eight years, FIIs favorite sector was banking, oil and gas, capital products financials and more. Within the last 3 years, insurance as a sector got the eye of FIIs and attracted important flows.
Recently, it has come into notice that foreign institutional investors are reducing their stacks in the large caps in India as large-cap stocks have not been performing well in the Indian market.
Foreign investors are expecting that if the market falls, the large-cap stocks will be the first to bear huge losses.
Let’s have a detailed insight into Foreign Institutional Investors and their impact on Indian investors.
Who are FIIs?
FIIs or foreign institutional investors are those investment funds that invest in foreign countries’ assets outside their headquarters. FII plays a significant role in any country’s economy. FIIs are those entities that invest in the Indian stock market.
There are numerous large organizations such as mutual fund entities, and banks that invest a huge amount in the Indian financial market. The presence of FIIs in stock trading and securities purchased by FIIs helps to move the market upward.
FIIs raising or reducing stakes should not be the only parameter by which investors should track before buying or selling a share or investing in a company.
Experts advise investors to do their own study and pick stocks that also match their risk profile. Investors can use both technical and fundamental parameters to make their buy or sell decisions.
Under fundamental parameters one can track Cash flows, EPS, PEG ratio, leverage on the books, revenue growth, as well as future CAPEX, spends, etc.
The reasons for buying, holding or selling any stock depends on the market participant – short term or positional trader, short-term or long-term investor, they say. Based on the financial and portfolio positioning, different actions can be taken.
“Besides fundamentals, there are technical parameters too that one tracks for making buying or selling decisions. One of the key parameters is the positioning of stocks relative to their respective 50, 100, and 200-day moving averages, as well as the direction of each of those averages,” says Kavalireddi, head at a renowned financial institution.
“A trader or a positional investor can use 50-day moving averages to identify short-term entry opportunities and 100/200-day moving averages to identify medium-term entry opportunities. Another technical parameter of importance is the price trend, both on the daily and weekly time frame charts,” he said.
Kavalireddi further added that investors can also track the put-call ratio of stock and index options, market breadth, ratio charts of stocks to indices, etc. “While these parameters do not provide an outright buy or sell signal, they can help one understand market sentiment and market positioning,” he said.
The companies in which FIIs have reduced stakes are mostly blue-chip companies and sector leaders. The primary reason behind the reduction of stakes in large-cap companies may be rebalancing the portfolio or booking the portfolio at a higher level. So if someone is holding any of the large-caps, they could still remain, net buyers, as the long term potential is intact.
Another reason for minimizing their stakes could be profit bookings as stocks like IFB Industries Limited and Adani Industries Limited have generated more than 200 percent returns, Likhita Chepa, a senior research analyst who works at a financial consultations company.
Chepa further added that the underlying reason for reducing their stake may be different for different stocks. Hence, it is advisable to go through a careful study with respect to each stock before making any decision.
Experts also said that the companies coming under Nifty 50 gave phenomenal returns. Most large-cap stock prices have gained a price hike, some delivering returns greater than 100 percent in a short time.
The four large-cap companies that have rallied more than 100 percent are JSW steel, Adani Enterprises, Tata Motors, and Laurus Labs. Meanwhile, nine stocks rose 50-100 percent since June 30.
What Should Investors Do?
Many investors think that FII’s decision to reduce stakes in large-cap companies is a negative sign for them. However, this is not so true. Instead, investors grab these opportunities to purchase high-quality stocks.
However, it should be noted that FII's decision to increase or reduce the percentage of shares should not be the only parameters investors should track before buying or selling stock in a company. Therefore, many experts advise investors to do stock market research and do their own study and pick stocks that also match their risk appetite. Also, investors can use both fundamental and technical analysis to make their buy or sell decisions.
Under fundamental analysis, one can track EPS, cash flow, leverage on the books, revenue growth, and more. Buying, holding, and selling any stock depends on the market participant - whether it is a short term or long-term investor. Different actions can be taken based on financial and portfolio positioning.
Final Thoughts
Foreign institutional investors and FIIs reduce their stakes in large-cap funds to book profits. This decision of FIIs is affecting Indian investor’s psychology that affects their decision whether to buy large-cap stocks or not. Therefore, many experts suggest not to panic about the situation and stick with quality stocks that will help you to develop future wealth creation. Staying or exiting in the large cap completely depends on the individual's decision. But before making any decision, do thorough research and analysis about a company that you want to invest in.
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