Foreign Institutional Investors (FIIs)

Meaning:
Foreign Institutional Investors (FII) is an investment fund or a gathering of investors.
Such a fund is registered in a foreign country, i.e. not in the country it is investing in.
Such institutional investors mostly involve hedge funds, mutual funds, pension funds,
insurance bonds, high-value debentures, investment banks etc.

We use this term FII for foreign players investing funds in the financial market
of India. They play a big role in the development of our economy. The amount of
funds they invest is very considerable.

So when such FII’s buy shares and securities the market is bullish and trends
upwards. The opposite may also happen when they withdraw their funds from the
markets. So they have considerable sway over the market.

Foreign institutional investors play a very important role in any economy. These
are the big companies such as investment banks, mutual funds etc, who invest
considerable amount of money in the Indian markets. With the buying of securities
by these big players, markets trend to move upward and vice-versa. They exert
strong influence on the total inflows coming into the economy.

Market regulator SEBI has over 1450 foreign institutional investors registered with
it. The FIIs are considered as both a trigger and a catalyst for the market
performance by encouraging investment from all classes of investors which further
leads to growth in financial market trends under a self-organized system.

Advantages

 FII’s will enhance the flow of capital into the country

 These investors generally prefer equity over debt. So this will also help
maintain and even improve the capital structures of the companies they are
investing in.
 They have a positive effect on the competition in the financial markets
  FII help with the financial innovation of capital markets
 These institutions are professionally managed by asset managers and analysts.
They generally improve the capital markets of the country.

Disadvantages

 The demand for the local currency (rupee) increases. This can cause severe
inflation in the economy.
 These FII’s drive the fortune of big companies in which they invest. But their
buying and selling of securities have a huge impact on the stock market. The
smaller companies are taken along for the ride.
 Sometimes these FII’s seek only short-term returns. When they pull their
investments banks can face a shortage of funds.

Difference between FDI and FII

Firstly FDI is a direct investment made in one particular business or company. The

aim is to get a controlling interest in the business. FII, on the other hand, are funds
which are invested in the foreign financial market.

There are many regulations and rules with respect to FDI. In fact, there are some
industries like nuclear energy, agriculture etc. where there can be no foreign direct
investment. But FII has fewer barriers for entry or exit from the market.

FDI is not only transfer of funds or capital. There is a transfer of technology, R&D,
know-how, strategies, technical knowledge, and many other such aspects. In the case
of FII, only the transfer of funds is there.