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Why Do FIIs Beat Retail Investors?
Tue, 29 Mar Pre-Open

Foreign Institutional Investors (FIIs) have been sellers in the Indian markets for quite some time though they have turned buyers in March. While we may be rejoicing at the fact that retail investments in domestic mutual funds have kept pace with the FII selling, we must also face up to a sobering fact. Retail investors have not made nearly as much money as FIIs have.

As per an article in Business Standard, FIIs have outsmarted domestic mutual funds. Looking at data from the stock exchanges, it is clear that most of the Foreign money flowed in to Indian markets during 2012 and 2013 when valuations were depressed. Once valuations peaked in March 2015, they have been selling.

This has worked very well for them. Unfortunately, domestic mutual funds were under huge pressure of redemptions in those days. They were thus net sellers, when they should have been buying. They started buying only when the tide of inflows turned positive in 2014. By then most of the easy profits had already been made.

Retail investors continue to pump huge amounts of money in mutual funds which have deployed these funds in the markets. Sadly, domestic investors have entered the game late and are thus staring at short-term losses in their portfolios.

We can't say that we are surprised. Retail investors tend to be influenced by sentiment much more than FIIs that have considerable resources dedicated to equity research. This is not to say that domestic institutions don't have good research teams but they are at the mercy of inflows from retail investors.

Fund flows into FIIs are comparatively more steady. They receive long-term pension and insurance funds along with funds from retail investors. This allows FIIs to buy stocks at cheaper valuations than domestic mutual funds.

We don't see a solution to this problem. We believe, as long as retail investors are influenced by herd mentality, they will tend to buy stocks at expensive valuations, either directly or via mutual funds. This will be detrimental to their chances of long-term investment success.

They should instead follow a bottom up approach of stock selection and invest only in high quality companies for the long-term. By investing in this way, retail investors stand a good chance to beat FIIs at their own game.

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Jan 19, 2018 (Close)