DIIs BUY WHILE FIIs SELL - WHOM TO FOLLOW?

By Ruma Dubey

Foreign Institutional Investors (FIIs) were sellers while Domestic Institutional Investors (DIIs) were buyers and we the people, are mostly mute spectators!

Many are perplexed, trying to figure out this contrarian behavior of both these institutional investors. In May 2015, the combined net FII outflow from debt and equity market amounted to Rs 14,262 crore. It was the first time since August 2013 (net outflow of Rs 15,696 crore) that the aggregate net flow in a month has been negative. On the other hand, in May, DIIs made net purchases of Rs.8582 crore in equity.

The same trend was seen in June too where FIIs were net sellers while DIIs were net buyers. FIIs in June sold (net) Rs.8193 crore worth shares while the DIIs were net buyers to the tune of Rs.12,026 crore, the highest monthly net purchase since January 2010.

And now the trends of July indicate that the exact opposite is set to happen – FIIs are once again turning buyers while DIIs are sellers.

Many in the market often are perplexed with this opposite behavior of both. But actually, this is how they have historically almost always behaved. When FIIs are buyers then DIIs are sellers and when FIIs are sellers, then DIIs are buyers.  So this time around too, they are both following their own set pattern. DIIs are looking smarter currently as they have bought into stocks when markets and sentiments were lowest in the current year till now.

But if we really do need to probe into the nitty-gritties of things, then we can look into what they are buying and selling, which could give us some understanding into their trading psyche or maybe their perception about the sectors.

What we learn from the street is that DIIs have been buyers in Infra sector stocks, capital goods while they were underweight in BFSI and IT. FIIs have a lower exposure to IT, healthcare, consumer staples, energy and metals. But they remain overweight in financials which includes mainly private sector banks and select PSU banks. Thus the only thing common between DIIs and FIIs – both are underweight on IT.

FIIs are banking on the BFSI and auto sector probably seeing a revival, assuming that RBI will now consistently reduce interest rates. They probably think that the RBI and the US Fed work the same way. And DIIs, who are home bred, “locals” so to say, know better. They know that RBI is not really open to aggressive consistent rate cuts and it will take a while for the cycle to be reversed and that means that the auto sector has a long way to go. DIIs have been paring their stakes in cyclicals, mainly auto and are putting more money into materials rather than defensive stocks.

Do we follow the FIIs or the DIIs? You and they are in two completely different situations and would be foolish to merely do what they do. FIIs have peer pressures to follow their herd but we do not. Warren Buffett has often talked about the “institutional imperative” where like a herd, investors follow each other, even if they know it is not logical as they do not want to “miss out”; not having the guts to take contrarian calls. This is ditto for FIIs and as well as DIIs as both are following their own herds.  And that also probably explains why mutual funds are not really fancied by Indian investors.

And we as independent, intelligent investors do not have such peer pressures to follow any herd. So do not follow either the FII or the DII. Do your own home work and take a well informed decision.  After all, you make your own destiny, not by blindly following the path of others.