FIIs are back big time. So what?

Mon, 19 Jul Pre-Open

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The growth opportunity that India presets has not lost on the foreign investors as yet. They continue to pour money into the Indian markets. This is even in the current situation, when there are fears of prolonged crisis in the US and Europe. As per latest data, FII investments into India has touched almost Rs 390 bn in 2010 till date. This is nearly half the sum (Rs 830 bn) that they poured into Indian stocks in the whole of 2009.

So, is this flow of foreign funds good or bad for the Indian markets? Well, the answer depends on whom you are asking this question. A short term trader would love to see these FIIs come in droves and take stock prices up. But a long term investor, gradually building his portfolio, would hate seeing stock prices surge due to the force of huge foreign money!

You see, India is one of the fastest growing economies in the world. So one cannot do but live with large inflows of foreign funds eyeing good returns. But in good times, what we generally forget that these very funds flow out in hordes when crisis strikes. And this tends to hurt sometimes, and hurt big.

Take the case of the financial crisis of 2008. India's fundamentals were far better than the developed world. And still its stock markets came in the firing line. Needless to say, FIIs did not figure out India's fundamentals properly. And it was mostly the smaller investors who paid the price for it. This may not be an isolated case though. Similar situations would play themselves out again and again as long as FIIs remain kingmakers.

So, is there a solution to solve this over-dependence on FIIs?

One solution is India's high savings rate, which currently sits in bank accounts and can flow into the stock markets only if the right security mechanisms are into place. There are factors that the SEBI can take care of. Like safety of minority investors' interests and making managements and institutions (like mutual funds) more accountable.

But what is not in the hands of the SEBI is the spread of investor education. And the right kind of investor education! We currently have several initiatives that talk about educating the investor to invest wisely. But moist of these initiatives have vested interests. They end up becoming the marketing campaigns of the agents and brokers who conduct such investor awareness programs.

Probably the individual investor needs to take matters into his own hands now. And how can he do that? By self-education!

Investing in stocks in not rocket science. It just requires you to carefully study the companies and make an informed decision. Having a disciplined approach also helps. Not investing on someone else's hot tips but rather doing your own homework is the first step to a sound investment. And then once you are into a good quality stock, holding it for the long term is the key.

If these steps are taken care of, one can distance himself from the noises about FII buying and selling. In fact, when FIIs sell and run out in hordes, it just creates an opportunity for you to enter into stocks at lower valuations. Remember this!