Foreign Institutional Investor (FII) is an institution established or incorporated outside India which proposes to make investment in securities in India. The term foreign institutional investor is probably most commonly used in India, where it refers to outside entities investing in the nation's financial markets.
FIIs include hedge funds, insurance companies, pension funds, investment banks, and mutual funds. Foreign institutional investors play a very important role in any economy. Yet many developing nations, such as India, have placed limits on the total value of assets an FII can purchase and the number of equity shares it can buy, particularly in a single company. 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
Advantages of FII’s
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.
FII help with the financial innovation of capital markets
These institutions are professionally managed by asset managers and analysts.
Disadvantages of FII's
The demand for the local currency (rupee) increases. This can cause severe inflation in the economy.
Sometimes these FII’s seek only short-term returns. When they pull their investments banks can face a shortage of funds.
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.
Difference between FDI and FII
FDI are starkly different in nature , objective and results. 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. 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.
Domestic Institutional Investors
Domestic institutional investors are those institutional investors which undertake investment in securities and other financial assets of the country they are based in. Simply stated, domestic institutional investors use pooled funds to trade in securities and assets of their country. DIIs include banks, insurance companies, mutual fund houses, etc.
DIIs invest most of their funds in Indian equity market so they are more secured and reliable and therefore rise in their investment is definitely a very positive indication for Indian investors. DIIs have always existed; there is nothing like they never existed. It’s just that they have emerged as net buyers in last few months. These investment decisions are influenced by various domestic economic as well as political trends. In addition to the foreign institutional investors, the domestic institutional investors also affect the net investment flows into the economy.
It is imperative for Indian investors to have strong DIIs because the factors outside can easily influence FIIs where as DIIs are much more stable than them.