Why FIIs and MFs behave differently

The two major institutional investors in the Indian stock market, foreign institutional investors (FIIs) and domestic mutual funds (MF), differ in their market behaviour as they play in the market at different times.

Investment patterns of these two players show that FIIs start selling at peak levels at the first sight of global meltdown and MFs continue to buy till valuations get cheaper with market fall.

Again, when the market reaches rock bottom, FIIs are the first to revert their position and go into a buy mode. However, at such a time, the mutual funds, which feel redemption pressure after a good amount of market correction, start selling.

The redemption pressure, more or less, comes when the markets bottom out, leaving the MFs with no choice but to start selling.

On the first eight trading days of the current month, when the markets stabilized around 16,000 levels "" a good 6000-point below its peak "" the mutual funds were net sellers on six days.

They net sold securities worth Rs 1,811 crore on six trading days and were net buyers worth Rs 654 crore on the other two days. Even during the meltdown in May-June 2006, the FIIs took the first call to sell and the net outflows stood at Rs 11,558 crore.

However, around the same time, the MFs were net buyers worth Rs 7,700 crore. The corrections got over after a 36 per cent fall in Sensex between May 10 and June 14, 2006.

In June, the FIIs turned buyers with net inflows of Rs 716 crore, while that very month the MFs sold securities worth Rs 1,957 crore. The Indian stock market started correcting after reaching its peak on January 8, 2008 (Sensex at 20,873 points).

A week later, the foreign players, who were already suffering from subprime losses, started booking profits. Between January 16 and January 31, the FIIs sold shares worth Rs 19,489 crore (Sensex went down 2,600 points). In February again, the FIIs sold shares worth Rs 4,051 crore as the Sensex corrected by another 1,000 points.

During the same period, the cash-heavy MFs (net inflows of Rs 19,000 crore in December, January and February) turned buyers in the market.

While the Sensex slipped by 4,300 points between January 15, 2008 and March 5, 2008, they bought shares worth Rs 5,300 crore.

Hemant Rustagi, CEO, Wiseinvestor, explained the reason behind these patterns. Historically, investors have treated mutual funds like stocks. So, when one looks at a pattern of collections, there are a large number of buyers for mutual fund schemes when the market is on the upswing.