What is FII? Foreign Institutional Investors

In stock market parlance, you will likely have heard the term FII. FII are foreign institutional investors who invest money in another country's financial markets and are recognized by that country's regulatory authority. FII encompasses mutual funds, hedge funds, insurance companies, and pension funds, among others. Read on to learn about the various aspects of FII and their importance in a country’s economy.

FII Meaning

FIIs are also known as foreign portfolio investors. They are typically large organizations with substantial funds that they invest in other countries other than theirs. They seek attractive investment opportunities to diversify their portfolio and potentially gain higher returns. FIIs constitute a significant source of capital for the country's economy in which they invest.

The presence of FIIs in stock markets helps markets to move up, and hence, their presence strongly influences the cash inflow of an economy.

Why do FIIs Invest in Other Countries?

Some prominent reasons for FIIs to invest in other countries include:

1. To gain exposure to new sectors
2. To benefit from gaining potentially higher returns
3. To hedge against risk in their own country
4. To gain access to firms that are not available in their country

Where Can FIIs Invest in India?

Now that you understand FII definition and their reasons to invest in other countries, let's learn where they can invest in India. FIIs can invest in:

1. Securities of primary and secondary market
2. Unit schemes floated by domestic fund houses
3. Derivatives traded on stock exchanges in India
4. Rupee denominated credit enhanced bonds
5. Indian depository receipts
6. NCDs issued by NBFCs
7. Security and Indian depository receipts

FII Example

Suppose a mutual fund house in Australia sees an investment opportunity in an Indian-listed company on the BSE. As an FII, the Australian fund house can take a long-term position in the Indian company. At the same time, it can be advantageous for Australian investors who want to invest in the Indian stock market.

Benefits of FII

Here are some of the prominent FII benefits:

1. Infusion of Foreign Capital: FIIs are instrumental in bringing foreign capital, which positively impacts the economy. It helps shore up foreign reserves and stimulate economic growth.

2. Liquidity Enhancement: FIIs increase market liquidity, facilitating smoother trading and reduced price volatility.

3. Strengthening Local Currency: FIIs play a significant role in strengthening local currency. Strong FII inflows boost local currency and vice versa.

4. Facilitates Technology Transfer: FIIs often invest in sectors that warrant advanced technology. Their investments in these sectors can augment technological know-how, which is highly essential for growth.

To Sum Up

As evident, FIIs play an integral role in the growth of a country's economy. Their decisions have far-reaching impacts. With the evolving financial markets, FIIs will continue to play a vital role in shaping world economies, including India.