Various group of investors, especially retail investors tend to replicate the buying and selling activities of foreign institutional investors (FIIs). This is because, the FIIs are considered to know more about what's going on in the economy and the stock markets. As per the article in the Economic times, in last one decade the FII activity spiked after capital controls were relaxed. Since the investments by foreign investors went up, it became an important parameter for various investor groups to determine the movement in the stock market.
On the other hand, the activity of the domestic investors has also increased; however, the quantum of investment is still much less than that of FIIs. This is essentially the reason why foreign investors' participation is considered important. But as an investor should one blindly follow on the FII activity?
FIIs have vital chunk of holdings in the Indian markets, and thus their buying and selling activities impacts the markets too. But investors should also keep in mind that these inflow or outflow is uncertain. In most of the cases, the economic policy of a country and its growth prospects attracts FIIs investments. Thus, if this group is not able to monetize well in a specific country, it will divest its funds towards the other geographies which can offer better returns.
At Equitymaster, we have always cautioned investors about the FII activity. We have always recommended investors to not get carried away with FIIs buying and selling actions. In our view, investors should look for such companies which have strong competitive advantage, with a sound management and buy them at attractive valuations. This will certainly help in picking out good stocks and in turn develop a superior portfolio. Than one need not worry more about what FIIs do next.