Do Foreign Institutional Investors (FIIs) ever lose money? Does the index level hold any real significance for them? Why do they buy stocks at elevated prices? What logic drives them to dump stocks near 52-week lows?
These are questions that often baffle retail investors. To make matters worse, TV anchors add to the confusion with statements like, “FII kahan jayenge? Laut kar yahin aayenge” (Where will FIIs go? They’ll have to return to our market). In this write-up, let’s break down how FIIs actually operate—and why conventional wisdom about entry and exit points may not apply to them.
Understanding the Market Structure: The Indian stock market operates through two main segments:
- Cash Segment: In this segment, you pay the full price and take delivery of the stock. If you use the Margin Trading Facility (MTF), you can leverage your capital up to five times. For intraday trades, the leverage can go up to 20x—meaning with just ₹1,000, you can take a position worth ₹20,000 (though this varies by broker).
- Derivative Segment: This is even more enticing. You can take futures positions by paying only 20% of the contract value as margin. In the options market, you pay the full premium when buying, and a significant margin when selling options.
There are two main types of options: Call and Put.
- You buy a Call when you’re bullish.
- You buy a Put when you’re bearish.
Interestingly, buying a Call is equivalent to selling a Put in terms of directional bias, and vice versa. The risk/reward profile changes depending on the strategy.
A Shallow Market Plays Into Their Hands: India’s stock market allows simultaneous participation in cash, futures, and options. However, many stocks in the derivatives segment are illiquid. The index itself is lopsided and susceptible to manipulation through delivery-based trades. With strategic buying or selling in a handful of Nifty 50 stocks, a well-funded player can sway the entire index—especially on expiry days, where index swings often reflect this vulnerability.
The Deadly Cocktail: A Fragile Index and Illiquid Stocks: A vulnerable index and illiquid stocks are ideal hunting grounds for market sharks. For them, entry and exit points are merely tactical—not strategic.
Let’s consider an example:
- Domestic Institutional Investors (DIIs) buy a stock at ₹1,000.
- FIIs enter the same stock later at ₹1,200.
Now, DIIs are sitting on a profit of ₹200 and decide to sell. FIIs absorb this selling and buy at elevated levels. Does that make them irrational? Not at all.
The Money Power of FIIs: FIIs operate on a different level. With the capacity to invest thousands of crores, their buying itself can move the stock price significantly. For instance, a ₹1,000 crore investment in a company with a ₹50,000 crore market cap could move the stock up 10–20%, depending on market sentiment, technical indicators, and resistance from DIIs or retail investors.
Now, before taking delivery, FIIs might do the following:
- Buy Futures
- Buy Call Options
- Sell Put Options
Here’s where it gets interesting. Suppose they invest ₹1,000 crore and cause a 10% price rise:
- Out-of-the-Money (OTM) Call options (say strike price ₹1,320) could triple in value.
- At-the-Money (ATM) Puts could lose 75% of their value.
- Futures would rise by 10%, but with 5x leverage, that’s a 50% return.
In Summary:
- Futures: 10% stock rise = ~50% gain (with leverage)
- Call Options: Value may triple
- Sold Puts: Depreciate by ~75%, resulting in gains for the seller
So, even if FIIs buy at a seemingly “high” price like ₹1,200, their total position across instruments can generate far higher returns than the DIIs who bought at ₹1,000. This is the power of capital, strategy, and access.
Critics May Disagree…
Some may argue against this view. But let’s face it—FIIs have a well-documented influence on stock prices, which is precisely why front-running remains a menace in our markets.
Conclusion: Can Retail Investors Benefit from FII Data?: Now that we understand FIIs aren’t constrained by traditional entry/exit points or index levels, can retail investors capitalize on their activity?
The short answer: Yes—but it’s not easy.
FII strategies involve multiple layers—cash, futures, options—which are often inaccessible or hard to interpret for retail investors. Watching Open Interest (OI) build-up in derivatives might offer some clues, but it’s only a small piece of the puzzle.
For most retail investors, the best course of action remains the same: Focus on strong fundamentals and invest with a long-term horizon of 5–10 years. Let the sharks play their game—you’re in it for the ocean, not the splash.
