To invest in the stock market, a person must understand the different terms and types of investors. Investors of all kinds flood the stock market, whether retail or institutional. SEBI has set forth rules and regulations for both types of investors.
Retail investors are the traditional investors who trade on the stock exchange, be it in ETFs, mutual funds, and more, through their brokerage firms. These investors sell in stock markets for personal use; hence, the amount they invest is much lower per their budget. The Securities and Exchange Board of India (SEBI) defines retail investors as those who support, buy, or hold shares up to Rs200,000.
On the other hand, institutional investors are divided into mutual funds, foreign institutional investors, domestic institutional investors, pension funds, etc.
Who Are Institutional Investors?
Institutional investors are those entities that pool money from numerous investors and other entities and then invest them across various financial securities. Institutional investors include
- Mutual funds
- Insurance companies
- Hedge funds
- Pension funds
- Investment trusts
- Asset Management Companies, etc.
Institutional investors can be either Foreign Institutional Investors (FIIs) or Domestic Institutional Investors (DIIs).
In this article, we will explore in detail what is FII and DII and what the difference is between FII & DII.
To understand the difference Between FII & DII, 1st, We have to explain what are FII & DII.
There are Three Categories of FII-
- NRIs (non-resident Indians),
- PIOs (persons of Indian origin), and
- FIIs (foreign institutional investors).
Now, the question is, how can these foreign investors invest in India?
To invest in India, they must do so through the foreign direct investment route (FDI) or the foreign portfolio investment route (FPI).
The FDI route can be divided into two categories: automatic and government. The automatic route includes long-term investments in a particular business or company that do not require RBI approval. In contrast, investments in the government route require specific consent from the government. Additionally, some sectors are not eligible for FDI such as nuclear, energy, agriculture, etc.
The foreign portfolio investment route (FPI) allows FIIs, NRIs, PIOs, and qualified foreign investors (QFIs) to invest in the Indian stock market, shares, and convertible debentures of Indian companies and units of domestic mutual funds. However, the RBI sets a ceiling on how much these entities can invest under this scheme.
Who are FIIs?
Foreign Institutional Investors are investors who are investing in India but are not a part of India. These investors are referred to as FIIs. They can be mutual funds or insurance businesses from any country. It has the potential to contribute to the expansion of our economy.
Foreign institutional investors must register with SEBI and abide by its requirements because they are not Indian companies. FIIs are sometimes referred to as FPIs (Foreign Portfolio Investors). Foreign direct investments (FIIs) have the potential to make or lose a significant amount of money due to changes in currency values. Some examples of FIIs are Morgan Stanley, Bank of Singapore, Vanguard
Limits on Foreign Institutional Investors or FIIs in Indian Stock
- FIIs can invest up to 10 percent of their total capital into a single company’s equity.
- The maximum amount foreign institutional investors (FIIs) are allowed to invest in public sector banks is 20% of the bank’s paid-up capital.
- Foreign institutional investors (FIIs) can only invest up to 24% of an Indian company’s paid-in capital.
- The maximum threshold can be lifted to 30% if the individual corporations receive permission from their shareholders.
Who are DIIs?
DIIs are Indian investors who want to profit by putting their money in the Indian stock market. Domestic Institutional Investors can put capital in insurance companies, mutual funds, liquid funds, and other investments. Both political and economic dynamics influence these investment decisions of Domestic Institutional Investors. DIIs have the same potential to affect the economy’s net investment flows as Foreign Institutional Investors do.
In India, domestic institutional investors play a big part in how the stock market performs, notably when foreign institutional investors are the net sellers in the country. The amount of money invested in the Indian stock market by domestic institutional investors (DIIs) surpassed the Rs. 2 trillion rupees benchmark in 2022.
Since March last year, the DIIs have invested more than Rs. 1 lakh crore in Indian equities. Some examples of top DII investors are HDFC Life, LIC, and Nippon AMC.
Types of FII vs DIIs–
For Foreign Institutional Investors (FIIs) –
1)Foreign Government Agencies–
Foreign Agency is a foreign entity, organization, or agent allowed by a foreign country’s laws to provide welfare services. For example – United States Agency for International Development.
2)Foreign Central Banks-
A foreign central bank is a bank that, by law or government permission, is the leading authority other than the government that issues instruments meant to be used as currency. A central bank is a financial organization that acts as the depository for the nation’s currency reserves—for example – the European Central Bank, Bank of Japan, and Bank of England.
3)Sovereign Wealth funds-
Simply put, a sovereign wealth fund is an investment fund controlled by the state and funded by the government, typically through the sale of surplus reserves. The economy of a nation and its residents both stand to benefit from the establishment of SWFs. An SWF may obtain its capital from a vast number of different sources. For Example – Korea Investment Corporation(KIC) and Taiwan National Stabilization Fund (TNSF).
4)International Multilateral Companies-
Multilateral organizations are formed when three or more countries band together to work on topics that are important to each of them. They ensure that everyone has a say in the management of global affairs while also ensuring that any relief efforts that are carried out are legitimate. For example – Global Environment Facility (GEF), European Bank for Reconstruction and Development (EBRD).
Domestic institutional investors (DIIs) –
1)Indian Insurance Companies-
In India, the significance of insurance firms has significantly increased during the past few decades. They offer financial safety in case of a fatal illness or accidental death, for example – Bajaj Allianz Life Insurance and Max Life Insurance.
2)Indian banks and other Indian financial entities-
Loans, lockers, and various kinds of insurance are among the items they offer. The profits generated from these assets are then placed in the equity markets. Examples include HDFC Bank, SBI, and Kotak Mahindra Bank.
3)Indian Mutual Funds Companies-
One of the most common financial vehicles used for investing is the mutual fund, widespread in India. They then invest the combined capital in desirable assets, considering the individual investors’ comfort levels with risk. Examples include ICICI Prudential Mutual Fund, Tata Mutual Fund, etc.
FII Vs. DII
Here are some key differences between FII and DII.
1.Headquarters-
The investor’s residence is the primary distinction between Foreign and Domestic Institutional Investors. FIIs are not from the same country in which the investment is made. DIIs are from the same country where the investment is made.
2.Limitations on the total amount of investment–
FIIS can only invest up to 24 percent of the total amount of the company’s paid-in capital. There is no such constraint placed on the ownership of DIIs.
3.Research teams-
Also, since FIIs are strangers to the investment country, they must conduct more detailed research before investing. Thus, they need a stronger R & D and research team compared to the DIIs. However, this superior research makes investors rely more on FIIs investments.
4.Stock market holdings-
FIIs hold approximately 21 percent of the overall holdings in the companies that make up the Nifty 500. On the other hand, DIIs have about 14 percent of all shares in the Nifty 500 companies.
5.Investing style-
Foreign institutional investors (FIIs) invest with a focus on the short to medium-term. Domestic Institutional Investors (DIIs) invest mainly for the long term.
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