Photo: Mint
Photo: Mint

FIIs, MF investors play a different tune on equities

In April-Dec, the net investment made by FIIs in stocks and retail investors in equity mutual funds has been similar. Yet data suggests they have gone in different directions. Mint takes a look

The Sensex crossed 42,000 last week. In April-December, the net investment made by foreign institutional investors (FIIs) in stocks and retail investors in equity mutual funds (MFs) has been similar. Yet data suggests they have gone in different directions. Mint takes a look.

Is the trend different for FIIs, MF investors?

The chart above shows that in April, FIIs bought stocks worth 21,193 crore. Equity MFs saw an investment of 4,609 crore in that month. FII investments then kept falling every month till August, when FIIs sold stocks worth 17,592 crore. Investments in equity MFs, however, kept growing till August, peaking at 9,152 crore in that month. From August onwards, the trend reversed again. FIIs started increasing their investment in stocks and investment in equity MFs started to fall. In November, FIIs invested 25,231 crore in stocks, while equity MFs saw an investment of just 1,312 crore.


Graphic: Sarvesh Kumar Sharma/Mint
Graphic: Sarvesh Kumar Sharma/Mint


What does this tell us about their thinking?

FIIs have net-invested 54,183 crore in stocks till December this fiscal. The net investment in equity MFs is an almost similar 53,391 crore. Despite this, FIIs and investors of equity MFs have gone in almost opposite directions. To put it more succinctly, when FII selling reached its peak in August, equity MFs saw their highest investment so far this fiscal. In the early part of the fiscal, FIIs were clearly worried about the high price-to-earnings ratios of Indian stocks. In May, the price-to-earnings ratio of Sensex stocks peaked at 28.4. As FIIs sold stocks in July and August, the price-to-earnings ratio fell to 26 in August.

What made FIIs positive on Indian stocks post August?

In August, the US Federal Reserve started printing money again to pump up the US economy. This drove down interest rates in the US. Money was available at lower interest rates. FIIs could borrow this money and invest it in Indian stocks, which is precisely what they did. The easy money policy that became popular after the financial crisis of 2008 made a comeback.

What is the Fed’s easy money policy?

In the years after the financial crisis of 2008, the US Federal Reserve printed money and pumped it into the financial system by buying government bonds and mortgage-backed securities. The idea was that with more money in the financial system, interest rates would fall and people would borrow and spend again, in the process the US economy would recover. As the Fed bought bonds, the size of its balance sheet expanded from $900 billion in late 2008 to around $4.5 trillion in early 2015.

What has changed in the Fed’s policy?

Since October 2017, the Fed started to suck out the money that it had printed and pumped into the financial system by selling bonds it had bought. In the process, the balance sheet of the Fed shrunk to around $3.8 trillion by August 2019. It has since expanded to $4.2 trillion. It is this newly created money that has made FIIs invest in Indian stocks all over again, since August. Meanwhile, the net investment in equity MFs has come down.

Vivek Kaul is an economist and the author of the Easy Money trilogy.

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