The dissonance between the behavior of FPIs and Domestic Investors
Why do these two categories of investors behave oppositely? An examination of FPI and MF flows since 2000 provides some answers. There is a consistent pattern in how these two categories respond during major market falls and recovery periods.
Let’s take for example the coronavirus scenario.
Foreign portfolio investors were in the vanguard, leading the selling in March this year, and the Nifty 50's 40% drop from its January peak was primarily attributable to their net sales worth Rs 61,973 crore. Mutual funds, on the other hand, were net buyers in March, spending Rs. 30,285 crore on stocks.
Since April, mutual funds appear to have been hampered by a few issues. One, given the large purchases made in March, they may have had little surplus to deploy after that, especially considering the sustained outflows from equity-oriented funds in the second half of 2020. Two, given the earnings contraction and decreased demand caused by the shutdown, they could have been more cautious about the prospects of Indian enterprises.
Foreign investors, on the other hand, appear to have decided to lodge their funds in India and China, both of which promised a faster recovery in 2021 due to larger local markets.
What’s the reason for this difference?
FPI flows are inextricably tied to central banks' monetary policies; the liquidity supplied by them through low-interest rates and stimulus money fuels these funds. FPI flows were at record highs between 2009 and 2014 when the Federal Reserve's quantitative easing program was in effect. FPI flows fell in 2016 and 2017 when the Fed announced tapering of stimulus and interest rate hikes, and they became negative in 2018. The spectacular resurgence of these flows can thus be connected to the return of interest rates in the United States to zero and the huge stimulus to combat the Covid epidemic.
Because US investors hold the lion's share of FPI assets, FPI flows into India are more vulnerable to conditions in the US. They are also more influenced by feelings in global financial markets, which is why they sell when global risk-off sentiment is high, as was seen in March of this year. However, as the recovery begins, they migrate to countries with greater economic prospects, which is why FPIs have propelled the market recovery in India.
Mutual funds, on the other hand, use a more stock- or sector-specific approach, and as a result, these investors are fast to recognize the value in market corrections and buy during bear markets. The inability to participate in the initial recovery is partly attributable to recency bias, as well as fund investors redeeming money.
#FII #DII #MutualFunds