MARKET UPDATES

Monday, September 12, 2016

HOW TO MAKE BIG MONEY FROM PENNY STOCKS

Sometime ago, I found that the stock of JP Associates was trading around Rs.6. It was a attractive pricing but I took some time to understand the fundamentals and identify the reasons behind the low pricing.

On fundamental terms, the stock had a P/B of Rs.60 but the company was in a debt trap. JP Associates is a renowned name with constructions as big as the Buddh International Circuit and the Yamuna Expressway. So, the management had a good reputation. I felt that, JP could sell some assets and reduce the debt. In that case, even if the P/B came down to Rs.30, the stock was undervalued. So, I made some investments. My reading turned out to be correct. JP Associates and Ultratech struck a deal and the stock price soared.

Investing in Penny Stocks is not always a good gamble. Sometimes, the low prices reflect that the company is in doldrums and will see more trouble. In such cases, one cannot identify the bottom and the price keeps going lower. In the more fortunate cases, investors get high returns like in case of Satyam. Sometimes, even the returns are so high that even Blue Chips cannot yield such returns. They are not the ideal choice for the safe investors but the risky trader likes these stocks.

Typically, stocks that trade below Rs. 10 are classified as penny stocks. Most of these stocks are under the trade-to-trade category for avoiding speculative activities.

There are risks associated with these stocks. There are possibilities of price manipulation as low prices make it possible to move prices with small investments. Once the manipulation is over, big player exit the stock while the retail remains trapped. Soon the stock prices crashes leading to losses.
There is also lack of information on penny stocks. Brokerages generally do not publish research reports on penny stocks. Sometimes, manipulations spread rumours and rig prices. It has also been found that the underlying companies often violate the exchange rules. Many a times trading gets suspended from these stocks. In such scenarios, the retail investors suffer.

On the positive side, a penny stock can become a multi-bagger if the company turns positive. Such a scope is less for a high priced stock even if the prospects are bright. New investor can take a gamble on these stocks by investing small amounts.

Investment in penny stocks can be done by considering certain factors. The fundamentals of the underlying company like promoter holding, corporate governance, business potential and management outlook should be studied. The trading volume should also be studied because low volumes often make it difficult to exit the stocks.

One of best possibilities of making a big buck out of penny stocks is to buy stocks that have a long terms story in them. As time goes on, the stock prices appreciate and the investment becomes multi-bagger.

Penny stocks are not the ideal choice for speculative trading. Although the stock may give some returns but the beauty of investment in penny stocks can only be realized through long term opportunities.
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Monday, August 22, 2016

WHY INVEST IN MUTUAL FUNDS

One fine day, our friend Ravi decided to have looked at his stock portfolio. The last time he did this was 4 months earlier. Back then it was in dismal state, the stocks were down by 20-30%. Today, as he looked the condition was even worse. They were down ever more except for one. The stock of DLF now had a positive return. Quickly, Ravi called up his broker and booked a little profit. Some relief!!!

He reached office with a smile and spoke to his friend Sam that finally he got rid of DLF. Sam said that he had brought the stock yesterday and would hold it as the stock is expected to see strong returns as the company is now seeing a turnaround. Ravi got disappointed as he had taken an incorrect decision.

What Ravi did is pretty common. The retail investor often fails in taking the wiser decisions in the markets. Here is where a mutual fund is of help. Basically, you outsource your fund to a fund manager who manages the fund on your behalf.  He is the one who studies the markets using his skills and invests the funds accordingly. 



The Mutual Funds have various advantages:

Needless to say, Mutual Funds offer professional management of money. There are research teams and qualifies professional to track the market movements and company prospects for making investment decisions.  They have a host of financial instruments for making investments and achieving the goal of the scheme. As such investments are in safe hands.

It has seen that mutual funds give more returns than other investment havens like FDS and RDs. The returns do not require addition effort as fund management is done by specialists. The mutual funds invest in high return assets and prove to be more beneficial for the investors.

Another key advantage in mutual funds is diversification. Diversification lowers risk as money is spread across industries and sectors. There is also the scope of investing in a wide range of securities.  This considerably reduces the risk associated with the decline of investment made in a single security or stock.

Mutual Funds also carry safety and transparency.  Safety is ensured by the SEBI which monitors the operations of the mutual funds. As performance reports of mutual funds are easily available from newspapers and financial websites, transparency is also ensured.

Sometimes, the salaried persons look for tax saving instruments. Mutual Funds which are ELSS offer tax benefits. So the salaried individual get the dual benefit of higher returns and tax savings.

Another key advantage is buying variety with low cost. In stock markets one requires significant capital to but quality stocks. With low capital one many end up buying a couple of units of one stocks. However, in Mutual Funds the NAV is pretty low and each unit represents stocks from various sectors. With an investment amount of Rs.500 one can buy some part of a large number of stocks.

Mutual Funds offer the approach of SIP or Systematic Investment Plan. One can invest a fixed amount of money every month and buy some units of the fund. At low price, more units are brought and vice-versa. As such the rupee-cost averaging allows investment in a disciplined manner.

Open-ended Mutual Funds also offer liquidity factor. At any point of time, all or part of the investments can be redeemed  at the current value of the shares.

Mutual Funds are of various types based on the investments made. There funds which invest more on equity while there are funds that invest more on bonds. Based on the risk taking ability, investors get to choose from a wide various of options.
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Monday, August 8, 2016

WHY USE SYSTEMATIC INVESTMENT PLAN

Often investors end up in investing loads of money in stocks and mutual funds at high prices and then not knowing what do to do when the price falls. Even though the concept of stop loss works to some extent in reducing the loss of investment yet in the course of busy lifestyle investors often find it difficult to keep track of the investments on a day-to-day basis. They want to approach investments like a single way solution by investing in quality stocks and expecting even quality stocks often get hammered due to some bad news.  Stock prices fall due to the sudden surfacing of some bad fundamental reasons and investors get trapped. This is especially common in the retail investors who feel trapped the most.

Take the example of DLF. The brand name is highly popular due of the reputation it has built over the years. Any new investor looking for investment in the stock of a real estate sector would more often than not choose DLF. However, even today when DLF is trading close to Rs.150 there are investors who have brought the shares at Rs.400, Rs.600 and even Rs.800. Similarly, certain investors of Reliance Communication have had a similar luck. Their investments had halved or quartered in the course of time. The brand name Reliance also does not guarantee positive returns. Even investment in mutual funds sometimes gives investors similar experience as they also invest in the stocks which offer no guarantee.

Here the concept of dollar-cost-averaging gains importance. In modern days it has transformed into the Systematic Investment Plan (SIP). The SIP is an investment plan in which investors invest a fixed amount of money in an investment avenue at regular intervals. It reduces the susceptibility to market fluctuations and brings in a disciplined approach to investment. On a broader perspective, it has seen that returns on SIP have beaten returns of the benchmark indices.

When it comes specifically to mutual funds the investment is done on fixed amounts at regular intervals. As the value of the NAV of a mutual fund varies the units brought would vary on every investment. The value of NAV determines the number of units brought.

In case of stocks SIPs have great advantage. Let us say due to ill fortune you end buying a stock and that gets hit by a scam. SIPs can offer you a cushion to some extent. One of the readers recent sent me a mail that he had brought JP Associates shares at Rs.42 a few years ago. The investor had invested a sum of Rs.50, 000 in the stock. Now the valuation has become almost a quarter. Here the concept of SIP would have helped him. If he had a policy of investing an amount of Rs.2000 every month on the stock for a span of 2 years the return would have been better. Here he would have been able to buy the stock at various prices ranging from Rs.42 to Rs.6. The quantity of stock brought at Rs.42 would have been only 45 but at Rs.6 he would have brought 330 shares, thereby the average buying price would have been much lower than Rs 42. This kind of investment over a span of 2 years would have worked well as the stock prices is now seeing upside.


Actually an investor buys more at low prices and less at higher prices than the concept of averaging where only price averaging works but quantity advantage is not found. Again, after averaging the prices often fall and the problem gets even more severe. Here SIP gives the advantage of buying at lots of prices rather than two prices. Even the whims of luck have really faced a rough time to make things difficult for an investor. The volatility and unpredictability of stock markets are avoided to an extent from damaging the investment. SIPs have the advantage of working in all market conditions. Thus a SIP offers a simple yet scientific approach to investing, which ensures a kind of shield from the market volatility.
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Monday, July 25, 2016

WHY YOU SHOULD INVEST IN ULIPS

Some time ago, I was looking for an ULIP to invest in. My prime objective was to save taxes under the 80C. I came across a ULIP which had given a return of around 25% per annum over the last 5 years. I was surprised at that. We often consider Mutual Funds as a way of investing in equities but do miss out on ULIPs whose returns sometimes exceed that of Mutual Funds.


ULIPs often many advantages:

Investments in ULIPs offer good tax benefits. Premium payments offer tax benefits under Section 80C and Section 80D. Withdrawals are also not taxable as they come under Section 10D.

As ULIP are basically Life Insurance instruments, they offer life insurance coverage. There is a sum assured for the life cover. They also offer flexibility to increase the sum assured if required.

ULIPs offer a savings as well as a life insurance at the same time. Mutual Funds provide no life insurance whereas pure life insurance offers only insurance coverage. ULIPs on the other hand provide both at the same time.

Some ULIPS offer top-up facilities.  An individual can put in additional investments in the ULIP above the regular premium to get more returns.

ULIPS come up with a range of funds to invest in. There are balance funds, debt funds and a lot more. There are funds that invest more in equities carrying more risk and funds investing less in equities carrying less reeks. Investors can choose a single fund and or switch from one fund to another during the policy term as per risk profile and market conditions. 

The advantage with ULIPs is that they carry some features of Life Insurance. For example they have riders.  Riders like Accidental Death Benefit and Disability Benefit offer policy holders much relief in times of need.

There is also a 15-day free look period. The policy holder can return the policy within this period if he/she is unsatisfied with it. The entire premium is refunded to the policy holder.

It is easy to monitor the performance of ULIPs as the latest NAVs are available on paper and electronic media. The performance of NAV reflects the performance of the ULIP.

Investments in ULIPs can be done through SIPs. One can keep investing a fixed sum of money every month. Depending on the NAV, the numbers of units are brought. Thus there is rupee cost averaging and investments are made with a disciplined approach.
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Monday, June 27, 2016

HOW TO START BUILDING CAPITAL FROM COLLEGE

Entrepreneurship needs capital. There are some who have dreams of entrepreneurship from college days, but they do not have the capital. Here is a plan on how to build the capital from college days itself-


The most important thing of financial management is budgeting. So, the college time should too have a budget on the expenses. There should be some analytics on how to cut back spending and save more. 

The holidays can be spent to do some work and earn some money. A couple of tuitions or part time jobs can be undertaken to earn some thing. As they time is money, so doing some useful activity can help to add to the capital.

Cutting down on living expenses through sharing of accommodation can also be done. Students who reside in single rooms can opt for shared rooms or dorms and save a lot of money. If you have high ambitions you do need to sacrifice some part of your comfort level.

Starting a savings scheme like is a brilliant idea. A college student can save some part of his saving in a recurring account or even better a SIP. This would bring a disciplined approach to savings and also build the capital for the future. Investing in stocks is not a good idea as the inexperience brain can take incorrect decisions and end up in losses.

One should not carry loans. The interest rate on loans is around 10%. At student age earning more than 10% on investments is very difficult. So if one is carrying a study loan, the priority should be payoff the loan as quickly as possible.

There are lots of companies that offer special student concessions.  A college student should track them and try to avail them in needs. However, one should buy something because a discount is there as it would not serve the purpose.

Resource utilization is an important skill for all entrepreneurship. Resource utilization can begin from college itself. For example, student buy books for semester and after the semester they sell it off at low prices. As these books are only required for a semester a student can easily avail them from the library.

Though it may sound a bit difficult, a college student can save a lot of money by doing things by him or her rather than spending money on others. For example, washing and ironing of clothes or even cooking owns food. It would require a lot of effort but would also lead to considerable savings.

There are excellent scholarship opportunities for students who excel at their studies. The key is to work hard and achieve good results. That would lead to scholarships and there would be more savings.

At college level, students need recreation and often that requires money. A lot of students spend a lot of money on recreation activities. The expenses can be saved by attending the activities which are free of cost. For example, rather than go the bowling club, one can play basketball in the college premises.


Some of us are in the habit of buying off thing without thinking of the use. Use like idea of taking books from library without buying, getting things on rent can also help in savings. Things for temporary usage like a book shelf can be taken on rent rather than buying.
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Wednesday, May 11, 2016

GROWTH AND VALUE INVESTING

Value Investing and Growth Investing are two of the most popular ways of investment. Both these strategies have been used by several ace investors to build their wealth. In this article we will explore these two ways of investment in a detailed perspective:

Value Investing
Value investing has been one of the most favored strategies used by long term investors. The basic idea of value investing is to buy stocks at valuations less that the intrinsic value. This is in contrary to the belief that stocks priced in all the information that is available and also events that are likely to occur in future. The value investor looks for differences between the market price and the intrinsic value of the stock.
The earliest concept of value investing came from the investment strategies used by Ben Graham and David Dodd in 1928. Value investing generally takes into account various fundamental aspects of the company like earnings, dividends and cash flow. It looks for stocks that are undervalued in the current market situations and expect the stocks to get fairly priced in due course of time.

Some important points of value investing:
1. Studying the financial aspects- Important parameters like asset value, outstanding debt and financial liabilities which play a key role in the fundamentals of the company should be studied. The ‘intangible’ assets like intellectual property, patents and trademarks should also be considered in the analysis.
2. Reason behind low prices- Investors should not rely on historical prices to determine the point of bargain hunting. The current market price of the stock should be compared to the intrinsic value of the company in current market situations and not on historical values.
3. Fundamental parameters- Important fundamental parameters like P/E ratio should be studied to compare earnings of the company to the current stock price. Stocks with low P/E, or low P/B ratio is generally regarded as good buying opportunities.

Growth Investing
Growth investing strategy focuses on the long term growth potential of the company for appreciation in stock prices.  It also takes into account the fundamentals of the company while analyzing the stocks, but the difference with value investing is that in growth investing the focus is on buying good stocks at good valuations while in value investing the focus is on the future potential of the company without much regard to the current scenario.
Growth stocks are often the stocks of new companies which show opportunities for rapid progress. However, whether the tide will continue to bloom will decide the fate of the investor.

Some important points of growth investing:
1. Check the earnings history- The earnings per share (EPS) of the stock over the last few years can give a good idea of how the company has been doing. The growth in EPS can reflect the growth story of the underlying company.
2. Estimating forward earnings- Since the idea is to identify growth, the analysis of forward earnings is very important. The investor can use the research reports of various brokerage houses and then do a bit of research himself/herself for this. Generally small caps and midcaps show greater growth prospects than large caps though they carry more risk.
3. Competitive Advantage- When looking for growth specific stocks it often good to buy stocks which have a dominant presence in their area of operation. Companies which have patents over certain technologies or ideas often prove to have a high competitive advantage. Companies facing high competition often face high pricing pressures and in turn the growth outlook faces lack of clarity.
4. Good management- Efficiency of the company’s management is perhaps the most important factor when choosing growth stocks. Ultimately, it is the management which decides the policies of the company.
5. Government policies- It is extremely important to keep a track of how the government policies’ would impact the company of the underlying stock. Often the government looks to give certain sector incentives or tax benefits which in turn give a positive outlook to the companies which operate in the sector.

Growth investing v/s Value investing
Growth investing is a strategy in which investors select stocks of companies that are expected to have a high growth rate. They expected the stocks of the companies to outperform the market and in the process achieve capital gains.
Value investing, is a strategy in which investors select stocks of companies that are assumed to be trading a discount to the intrinsic value.  For this metric such as a company’s price-to-book ratio or price-to-earnings ratio is used in order to estimate a company’s worth.

Some great investors
Philip Fisher was one of the greatest investors in the world who followed the growth investing philosophy.   Fisher began his career on Wall Street in September 1929 one month before the beginning of the Great Depression. In 1931 he started his own investment firm, Fisher & Co. The firm followed a growth investing philosophy.
 As the American economy pulled out of the Depression, Fisher began investing heavily in companies that grew profits.  One of his largest investments was in Motorola, which he bought in 1955 when it was a young start-up held it until his death in 2004.  He said that if a company is managed well and it is able to grow, there’s no reason to sell it.  Benjamin Graham on the other has been a follower of Value Investing. He also launched his career during the Great Depression and found tremendous success with the philosophy of Value Investing.
However, Warren Buffett has said that his philosophy is “15 percent (Philip) Fisher and 85 percent Benjamin Graham” meaning that follows both Growth and Value Investing.
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Monday, April 18, 2016

WHY YOU SHOULD INVEST AGAINST THE CROWD

To get a reward you need to take a risk…

One the most remarkable stock price movement I ever saw was Satyam. The stock price fell from around Rs. 500 to Rs. 8 and then recovered all the way to Rs.100.
For the traders on the first half it was a nightmare what for the risk takers who brought around the 10 rupees zone, the return was around 1000%.

Moving against the crowd requires a lot of courage. It requires nerves to steel to buy a stock when there are only talks of doom about it, everyone is pessimistic, people are panicked and there is only uncertainty.

This kind of contrarian investing requires deep analysis and looking for disconnect between what the crowd feels and what the reality may turn out to be. 

Let me tell you about Animesh, a man who brought Satyam at Rs.11 and sold at Rs.60. He is a wealthy person and believes that gambles are required for larger gains. He believed in the Indian Corporate Governance and when the stock price fell, he believed that the government would come out with a resolution. At Rs.11, he thought, it can’t get worse and there is a decent chance of at least a 60-70% return. So he invested Rs. 1, 00, 000 in the markets and made 6 times profit.

This was a classic example of how a risk taker analyzed the ground reality and compared it with the general sentiment. It was enough for him to identify the possible gains.

A bear mentally can also work in this way. We all know that Shankar Sharma said in 2007. The markets became too euphoric. A realistic person would realize that the fundamental were not that much good and short the markets.

Identifying sentiment is requires a good deal of experience. One of the mathematical parameter that can be use is to use the idea of value investing. One can study the valuations and identify the stocks that are undervalued. P/Es and P/Bs can be used to study valuations.


Let me tell you how I was investing in the 2008 lows. I was relying on dividend investing philosophy. I brought stocks which had a dividend yield of more than 8%. My simple idea to get returns at least something compared to FDs.  Dividends also reflect the cash in books of the company. When the markets recovered, my stocks also recovered.
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Monday, April 4, 2016

HOW TO CHOOSE BETWEEN STOCKS AND MUTUAL FUNDS

Santanu works as a manager in an IT firm. He gets a high salary and as such he has a lot of wealth which he can invest. Buying a land won’t work for him, as he does not have much of time for that. He also does not have the much know-how on purchasing land. Investing in other real estate is not much worth. He has realized it going to be equities.

He gets hold of an RM in a top broking house over the phone. “Come to this address I want to invest in mutual funds”. Santanu asks him for a good and quality fund. The RM talks of a large cap fund and talks about the big names in the portfolio. Santanu gets impressed and draws a cheque of Rs.100000.

Months later, the RM gives him a suggestion to invest directly in equities. Santanu trusts this guy as the Mutual Fund is in positive and demat is in place. Now he has a question, “Which stock should I buy”? His colleague asks him to invest in a small cap company.

After 6 months, the market moved by 8%, the mutual fund moved by 12% but the stock remained at the same price. What went wrong?


When markets move, the small and midcap stocks move more. However, not all investor have the skill to identify the quality small and midcap stocks. This should be brought through mutual funds. A mutual fund has a professional management to make the investments on behalf of the investors. For investors, who do not have the required expertise to identify the lesser known names, Mutual Funds are an excellent option to invest in small and midcap stocks. The fact that mutual funds carry diversification feature further reduces the risk associated with small and midcap stocks. A unit of the fund many represent 6-7 stocks and as such the risk associated with a single stock investment is reduced no matter how much the capital is. Though, I have only spoken about investing in small and midcap mutual funds, investors may invest in other types of funds as per the requirements. One may also invest in bonds and money market instruments through mutual funds.

The disadvantage with mutual funds is that the investor has to pay additional charges for the fund management and other facilities. The investor also has to depend on the fund manager to get him good returns. He does not have any say on the investment decisions.

If the investor can take care of the risks associated with equities, one can directly enter the equity markets. However, if one cannot but skill wants to be a part of the equity markets, he should buy only large caps and the blue chips. These stocks are comparatively safer investments scopes and such investments are safe.
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Monday, March 28, 2016

PORTFOLIO MANAGEMENT

The word portfolio is very common in the financial markets. We hear investors talking about portfolio and its constituents all the time. Let us have an understanding of what a portfolio is and how to have a stunning portfolio.
Going by terminology, a portfolio is essentially an aggregation of the financial assets that is owned by an individual. It may have stocks, bonds, commodities and any other kind of financial instruments.
A portfolio may also be owned by financial institutions.
Here we will only look at a portfolio which contains stocks. The discussion will be about to have a stock portfolio that outperforms the benchmark indices from time to time.
Just like the performance of a cricket team depends on the team performance rather than on individual performance, a booming portfolio cannot be achieved by having a few quality names.
Building a portfolio is much like building a team. Having the best of players does not make a great team, but the balance of the team which decides its performance.  The role of each player should be according to the need of the team. Likewise a portfolio should be made of stocks which give a good balance to the portfolio, which can performance under all conditions.

Here are some features of a quality portfolio:
1. A portfolio should have a time horizon
Many investors do not have a clear understanding of investing or trading. An investment portfolio aims at getting medium to long term benefits while the trading portfolio aims to give returns in spans of days or weeks. It is a good idea to a have 2 separate portfolios - one for investment and one for trading. Using two different trading accounts can help a lot in achieving this objective.
2. A good strategy
A portfolio must be built according to a strategy. The stocks in the portfolio should fit into the strategy. For example, when building a long term portfolio, the long terms prospects of the portfolio should be analysed. A portfolio can be built as per a theme. It may focus only on the stocks of a particular sector which which would see good prospects in the future. From time to time, the portfolio should be analyzed to see that the stocks are playing as per the strategy.  If not, then the stocks should be shuffled.
3. Cut down losers and add runners
It has been seen that investors have a general tendency of holding on loss making stocks and booking out on profitable stocks with minor profits. As such loses keep mounting while profits get locked down. It is advisable to cut down the loss making stocks as they are seen as weak investments. On the other hand, the weight age of profit making stock should be kept on increasing. The use of trailing stop loss can help in making this working out this strategy as it would eliminate keep positions. Averaging profits can help to increase positions on profit making stocks.
4. Have Diversity
Investors should be distributed across a wide range of stocks to have variation. This would allow over dependency on a single stock which may lead to huge losses in case the stock faces huge declines. Such shocks can be averted by having a wide range of stocks across sectors and companies which add balance to the portfolio. On the other hand, too much of diversification creates confusion. The investor ends up in buying too many stocks and is not able to track them properly.
5. Cash- Carrying strategy
 Cash should also be considered as a form of asset. Investor should choose to stay in case when situation are unfavourable. Cash helps the investor to avoid losing money in poor market conditions. Staying in cash is better than losing money by taking wrong trades which can result in losses. An investor should switch his investment in equity and cash, according to the market scenario. In risky situation there should be more of allocation in cash than stocks while in rewarding situation the allocation in stock should be high.
6. Regular investing
The best way to build a portfolio, especially long term portfolio is to follow a systemic investment plan where there is regular investment. Rather than investing the entire sum of investment in one go the investor can keep adding the stocks at regular intervals. In this investment pattern the investor is able to buy a stock in a wide range of prices. Here again, one should add to the profit making position and not engage in averaging out losses. The investor thus buys good stocks and does not keep building positions in weaker counters.
7. Monitor performance
Just like the performance of mutual funds is measured by comparing their performance relative to the benchmark indices, the performance of a portfolio can also be measured so as to evaluate its is performing well. The returns of the portfolio should be compared to the performance of the benchmark indices over a particular time frame to get a good measure of how the portfolio is doing.
8. No profit booking on Time

Just like life, there has to be a satisfaction level in stock markets. When stock prices go up, investors should not get carried away by the more greed and hesitate to book profits. Profit booking or at least partial profit booking on opportunities is extremely important. As situations change in markets, there may be a sudden change of fortunes due to some news regarding the company and profits may get wiped out. However, here again one should have a logical and clear thinking about when to book out of stocks.
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Monday, February 8, 2016

FII EFFECT ON INDIAN MARKETS

There is a lot of interest in retail investors with regard to how FIIs are anticipating the markets. Many investors tend to make their investment decisions purely on the basis of the FIIs buying and selling figures in the markets. This article is aimed at exploring the behavioural impact of FIIs on the Indian Equities.

FII means Foreign Institutional Investors. Foreign Institutional Investors are investors who are from or registered outside the country. The floodgates for the FIIs into the Indian Stock Markets were opened by the 1991 Economic Liberalization. This was further encouraged by the relaxation of cap on foreign investments in 2005. With the launch of these reforms, Foreign Institutional Investors were allowed to invest in the Indian Stock Market.

The entry of the FIIs into the Indian Stock Markets was seen as a major breakthrough in the path to making India an economic giant. Development in the infrastructure facilities such as Roads, Railways, seaports, warehouses banking services and insurance services required huge deal of investment. Such investments cannot be provided by the Government or the domestic funds. To meet these financial needs foreign capital is highly required.

FIIs also have another impact on the economy, but we will focus on how they impact the stock markets. Studies show that FIIs can start off a market rally. As they start a rally flows come from all classes of investors, which drive the markets. Once the markets enter this kind of a phrase FIIs do not have much of an impact. However the selling or profit booking activities of FII can hold a rally, but cannot reverse the trend at one go.

FIIs have a significant influence on the movement of Midcap & Small cap Indices. It has been seen that there an upward trend in FII flows generally lead to a rise in the Midcap & Small cap Indices and vice-versa.

There has been a wide variety of opinions regarding the impact of FIIs on Indian Stock Markets. In the year 2002 Stanley Morgan said that FIIs do influence the short-term market moves. This is more dominant in bear markets than in bull markets. In 2003, in another research report by two individuals Agarwal and Chakrabarti, it was said that equity returns have a direct correlation to the FII activity. They said that as the FIIs are investors of high volumes they tend to a play a major role of market makers. In falling markets FII buying helps in jacking up the stock prices, whereas in a rising market FII can dither the rise in stock markets. As such the impacts of FII have a lot to do with the equity returns. In 2008, P. Krishna Prasanna did a research on the factors on the basis of which FIIs picks their stocks. He found out that FII have more interest in companies in which there is more public holding rather than in those where the promoter holding is more. The fundamental indicators of a company’s prospects like share returns and earnings per share play a significant role. In 2009, Anand Bansal and J.S.Pasricha did an analysis of the behavior of India stocks before and after the entry of the FIIs.  The analysis revealed that even though volatility has gone down there has been no significant change as far as returns are concerned.

Many experts consider FIIs come in bulk when there is money to be made and leave abruptly at the first sign of impending trouble in the host country. As such, they induce undesirable risk and uncertainty in markets. FIIs bring in severe price fluctuations resulting in increasing volatility as they are always on the lookout for profits. As such FIIs bring in a lot of volatility in the markets. Volatility is often viewed as a negative in that it represents uncertainty and risk.

It is quite evident that FIIS do a key role in the stock markets. However, India continues to emerge an economic power it needs to reduce the dependency on FIIs. With savings to the tune of roughly 35% of GDP, India's need to increase the exposure of domestic funds like Pension Funds, Provident Funds & other Large Corpus Funds to the equity markets. There should be policies that keep a check on the volatility factor which arise from the Foreign Institutional Investments by encouraging long term funds. Sustained long term foreign investments help in curbing volatility, maintaining currency stability and creating an environment for inclusive economic development which contribute to the country’s growth. 
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