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FIIs Risk-Return Tradeoff - Views on News from Equitymaster
 
 
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  • Jul 29, 1999

    FIIs Risk-Return Tradeoff

    A study, undertaken at equitymaster.com, to estimate the gain in the portfolio values of FIIs between the 1st of March and 22nd of July 1999 has produced remarkable results.

    The FIIs, which had portfolio investments to the tune of US$ 6.4 bn on the eve of the presentation of the Annual Budget, have seen the value of their portfolio grow to US$ 9.1 bn on the last day of the study. This translates into a gain of 42.2% for the period and 155% if taken on an annualised basis. Gains on the incremental investments of US$ 739 mn from March to July amounted to US$ 139 mn, taking the total gain to a whopping US$ 2.8 bn during the period. As the data on the investments made by FIIs is not available, the gains were estimated by assuming that the returns were perfectly correlated to the returns on the BSE Sensex.

    The period under study commenced on a positive note as the annual budget, which had drawn rave reviews, led to the BSE Sensex appreciating by 17% from its pre-budget close to a level of 3,784 within the next 11 trading sessions.

    The stock markets had just begun to consolidate its post budget gains when the Indian economy suffered a by-now-familiar jolt - political uncertainty. This uncertainty culminated with the dismissal of the BJP led coalition government in mid April. The stock markets retreated drastically as the fate of the much-admired Finance Bill became uncertain. The subsequent passage of the Finance Bill however did bring some respite to the markets.

    Subsequently, the markets were flooded with news of the signs of economic recovery -increase in the non-oil imports and non-food credit. The increase in cement dispatches and commercial vehicle sales too lent support to this view. The market rallied behind the news to touch a high of 4,124 on the 19th of May.

    Jinxed, as it may seem, the rally was disrupted by the abrupt break out of tension on the Indo - Pak border. The war-like situation, which at times threatened to escalate into a full-scale war, ended when a cease-fire was declared on the 12th of July. Despite the war-like situation, the sensex registered a gain of 15.5% from the start to finish of the Kargil tension. This bull run was led by the FIIs, which kept pumping money into Indian markets, on the back of the good economic numbers.

    The sensex continued to post gains after the cease-fire was declared to close at an all time high of 4,729 on the 22nd of July. The sensex had gained a stupendous 34% since the 1st of March, despite the political crisis and the war-like situation at Kargil.

    What, however, makes this performance of the FIIs creditable is that they continued to pump in money into Indian stocks despite the prevailing tensions. It is for this enormous risk which the FIIs took that they have been proportionately rewarded.

     

     

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