What is Foreign Institutional Investments (FII) & Its Benefits?

Did you know that FIIs affect the local currency of a country? When more foreign institutional investors are interested in a country, it leads to the appreciation of the local currency. Similarly, such investments have a role to play in cash inflows, the country’s economy, and job creation. Domestic investors also keep track of foreign investment activity to understand the market sentiment, liquidity, volatility, and other factors. Let us discuss what is foreign institutional investors are in detail.

What are Foreign Institutional Investors?

Foreign institutional investors, also known as FPIs (Foreign Portfolio Investors), are entities or organisations investing in other countries’ financial markets. For instance, organisations and entities of foreign countries investing in Indian markets will be foreign institutional investors. It is crucial to note that foreign individuals aren’t usually counted as FIIs. Individuals usually depend on entities to distribute financial products belonging to foreign markets. FIIs can be hedge funds, mutual funds, insurance firms, and other institutional investors. Even governments of other countries invest in the Indian markets, thus falling under the category of foreign institutional investors.

Foreign portfolio investors invest in a wide range of securities available in foreign markets. They invest in stocks, bonds, debentures , units of schemes, government securities, and other assets. They allocate funds across different assets to build a diverse portfolio and contribute to liquidity in a country’s financial markets. It also brings cash inflows and helps in the appreciation of the domestic currency. Such investors are significant contributors to the growth of the economy. However, there are certain risks associated with them. For instance, a country’s market might experience high volatility when its withdraws their investments abruptly/suddenly.

Types of Foreign Institutional Investors

Knowing the full form of FII full form is not enough for investors. You must also understand its types, which are as follows:

Sovereign Wealth Funds

These are investment funds managed by the state. These funds are filled through a country’s reserves over time. Governments are responsible for maintaining these funds. A nation and its citizens benefit from the development of SWFs.

Recommended Read: Foreign Direct Investment

Foreign Government Agencies

It includes foreign entities and organisations allowed to indulge in welfare services. Besides investing in foreign markets, these agencies can help with investment promotion, trade relations, and regulatory oversight.

Foreign Central Banks

These are significant institutional investors holding foreign exchange reserves. These banks may invest their reserves in government bonds, stocks, fixed-income instruments, and other assets in foreign markets. They often use their reserves to stabilise the exchange rates of their respective countries.

International Multilateral Organisations

These are formed when three or more countries join hands for relevant investment issues. These can also be organisations involved in setting regulatory norms for this these activities. For instance, the World Bank is an international multilateral organisation that offers for different projects.

How FIIs Work?

It FIIs must register with the Securities and Exchange Board of India (SEBI) to invest in Indian markets. Also, the registration requirements will change according to the type of Foreign Institutional Investments in India. They pool money from different sources and invest in accessible securities.

Foreign institutional investors also have the right to invest in IPOs of Indian companies after fulfilling the requirements. Many secondary markets are also accessible to FIIs in India. Government securities like commercial papers, credit-enhanced bonds, non-convertible bonds, and units of schemes are available for such investors.

Benefits of FIIs

There are numerous benefits of FIIs. The primary benefit is increased cash inflow, which can boost the economy. Governments of different countries often run campaigns and advertisements to attract foreign institutional investors. Investment inflows also have a relation with the local currency. A high inflow will help in the appreciation of the local currency. Not to forget, increased Foreign Institutional Investments activity also improves the economic relations between the two countries.

Foreign institutional investors investing in Indian markets have a significant impact on liquidity. As liquidity increases, domestic investors also have more opportunities. Price volatility is also lower when FII activity is high. However, price volatility will increase significantly when they withdraw their investments suddenly. Domestic investors also keep track of this activity to understand the market direction, liquidity, volatility, currency movements, risks, and other factors. FIIs also help in the development of a country by investing in infrastructural projects, public schemes, and innovative companies.

Factors to Consider

Before you access the foreign institutional investors list online, here are some factors associated with Foreign Institutional Investments.

Regulatory Environment

Such investors will not invest in a country without considering the regulatory landscape. A country with strict laws for foreign investments might fail to attract FIIs.

Political Stability

It is another essential factor considered by FIIs before investing in a foreign country. A country with political instability is not the right choice.

Recommended Read: FDI vs FPI

Liquidity

FIIs will not invest in foreign markets without considering the liquidity. Increased liquidity makes it easier for them to purchase or sell securities. Domestic investors also link increased FII activity with high liquidity and make investment decisions accordingly.

Currency Exchange Rate Movements

FIIs keep track of currency exchange rate movements, as it might affect their returns. Any foreign investor will first consider the stability of a foreign nation’s currency before investing in its markets.

Company Performance

As discussed above, FIIs might also invest in Indian companies through stock exchanges, Initial public offering , or mutual funds. They consider the company’s financial performance for the past few years before making a decision.

Role of Foreign Institutional Investments

Now that you have understood what are foreign institutional investors let us discuss their role in the market. They are a source of foreign capital to the host country. They invest in diverse securities like stocks, debentures, and bonds. They also fund infrastructural projects, public schemes, and other things that lead to the host country’s development. These investors have a crucial role in increasing the liquidity in the financial markets of the host country.

Foreign Institutional Investors serve as an indicator of the host country’s economic stability and booming business environment. When their activity is high, liquidity and investors’ sentiment are also positive. They also contribute to market depth, volatility, domestic currency appreciation, and capital inflows. Did you know they also help in technology transfer to the host country? There have been instances where they have invested in technological and innovative companies in India.

Difference Between FDI and FII

Investors often get confused between FDI (Foreign Direct Investment) and FII. Even though both bring foreign capital inflows, they are different. Here are the key differences between FDI and FII:

FDI FII

FDI is the investment made by a foreign individual or entity in a domestic business. These investors usually acquire ownership stakes in foreign businesses.

FIIs are foreign entities or organisations that invest in domestic financial markets. They invest in a wide range of assets like government securities, bonds, debentures, and equities.

Investors might open a joint venture or subsidiary. They might also indulge in M&As (Mergers and Acquisitions). It gives them significant control of a company in a foreign land.

They invest in stocks of foreign companies but usually do not aim for control or management of foreign entities.

They show a long-term commitment. For instance, a company opening a subsidiary in a foreign country will commit for the long term.

They usually purchase and sell securities in foreign markets based on their goals.

Foreign direct investors are often driven by building a strong presence in a foreign country.

They usually aim at portfolio diversification and capital appreciation.

Foreign direct investors are usually subjected to company, business, and market risks.

Foreign institutional investors are more concerned about market risks.

Conclusion

Foreign institutional investors are essential for a country’s economic growth. They bring capital inflow to the host country and help with currency appreciation. Domestic investors must keep track of FII activity to make informed economic decisions. FII activity has an impact on the liquidity and volatility of domestic markets. They also influence the market direction in many cases. Start tracking this activity to make informed decisions!



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