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Should retail investors follow FIIs while investing in equities?

Do so only after understanding the reasons behind their buying and selling

Priya Nair  |  Mumbai 

Last year, retail investors largely stayed away from equities. However, foreign institutional investors (FIIs) bought shares worth Rs 1.1 lakh crore. In December alone, FIIs bought Rs 15,614 crore worth of shares to raise their stakes over 30 per cent in companies such as HDFC, HDFC Bank, IDFC, HDIL, Glenmark Pharma and Havells India, among others.

In many other firms, the stake is more than 20 per cent. Is there something more that FIIs know? Can one take cues from them and buy the same stocks?

Take tips from FIIs by all means, say experts, but understand the reason behind their action before you invest. According to Feroze Aziz, director and head (investment products) at Anand Rathi Private Wealth Management, following FIIs' buying patterns is a good idea for an active and disciplined investor. Investors must understand the opportunity cost is very different for FIIs and their action in buying or selling might not be only guided by the inherent performance of the stock or company but because FIIs need liquidity. So, selling by FIIs should not be attributed only to the bad performance of a stock.

"When you see large trends emanating from FIIs, understand the trend and if the reason is external, ignore it. But if it is internal or something specific to that stock, you can blindly follow it," says Aziz.

For example, after the US central bank announced the tapering of its bond buying, Indian markets fell and three to four stocks that were FII-heavy, fell the most. However, a month later, when the tapering was deferred, the same stocks saw FII money coming back. It is not as though the stocks were not good or their fortunes had changed within that period, Aziz points out.

Making the case for retail investors to follow FIIs' buying pattern, Yogesh Nagaonkar, vice-president (institutional equities) at Bonanza Portfolio, points out that FIIs buy with a time-frame of three-to-five years. They buy stocks of companies with good corporate governance and having good liquidity. All these are steps that any equity investor should follow.

However, while FIIs are usually satisfied with getting about 12 per cent returns annually (since it is higher than the seven per cent returns the US treasury offers), retail investors who can earn around nine per cent on bank fixed deposits might not be satisfied with 12 per cent returns from equities. This could lead to disappointment among those investors who follow FIIs' buying patterns.

Also keep in mind that FIIs have their own objective, says B Gopkumar, executive vice-president and head (broking) at Kotak Securities. For instance, a long-only fund will be prepared to stay for 10 years and might not mind if the stock falls 20-30 per cent in that period, because they are prepared to wait for a whole cycle. However, a hedge fund could have an investment horizon of only two to three months. Exchange-traded funds will copy and replicate that index. If they are following an Emerging Market index, they will sell stocks if that index falls. So, retail investors should understand their own risk profile and be clear about their objective.

It is true that FIIs' investment decisions are backed by in-depth research, as they are serviced by the best analysts in any brokerage. So, they are generally a little ahead of the curve and, hence, it won't hurt a retail investor to take cues from such stock movement, says Aziz.

It is not necessary that FIIs' decisions are always on the mark. Nagaonkar says FIIs had bought shares of gold loan firm Manappuram Finance, when the stock was trading at Rs 30. After that, it fell to Rs 10. FIIs, which had picked up as much as five per cent stake in the company, lost money. "Following FIIs blindly means you could get stuck with stocks that are difficult to sell. So, it is better to do the due-diligence yourself," he says.

Sometimes, FIIs might buy or sell because of anticipation/ apprehension of a change in government. For instance, Larsen & Toubro's price ran up from around Rs 1,100 to Rs 1,140 in the first 10 minutes of trade on the BSE on December 9, 2013, after the Bharatiya Janata Party emerged the single-largest party in the Delhi elections. This was due to block deals by FIIs, says Aziz.

Even domestic institutions agree it is prudent to focus on the individual merit of the business, even if the broader trend is that FII participation in the Indian equity market has been increasing consistently. Neelesh Surana, head (equity) at Mirae Asset, says: "In the past five years, FII investment has been about $90 billion. Last year alone, it was $20 billion. FIIs now own 21 per cent in Indian equities, and 44 per cent of the free-float, which is at its peak. The conviction among FIIs is more than that of domestic investors, although problems with the Indian equity markets are more domestic-centric. But we continue to focus investment decision on individual merit of business, rather than flow of money or direction of the markets."

Going ahead, FII interest in Indian equities is likely to increase, despite the tapering in the US economy. "The impact is more on the debt side, which has already witnessed outflows. Improvement in macro-economic factors, and election outcome would overweigh decision of FII investment, rather than the impact of tapering," Surana adds. Nevertheless while FII interest could continue, don't blindly follow FIIs. Buy only if you are convinced of a stock.

First Published: Sun, January 12 2014. 22:29 IST