What Is Foreign Institutional Investors (FIIs)?
Foreign institutional investors (FIIs) invest in a nation's financial and economic markets. They include mutual funds, hedge funds, pension funds, banks, insurance firms, and other institutional investors. FIIs are influential participants in world capital flow and market liquidity.
How Does Foreign Institutional Investor Work?
- Registration & Compliance: FIIs must register with the governing body SEBI to invest in domestic markets.
- Investment in Markets: FIIs invest in equities, bonds, derivatives, and other financial products to gain returns.
- Capital Inflows & Outflows: FIIs channel foreign capital into a nation, which can stimulate market growth and lead to volatility when they withdraw.
- Diversification Strategy: They diversify investments across different nations to reduce risk and maximise returns.
Advantages Of Foreign Institutional Investors
- Increases market liquidity: FIIS affects huge funds, facilitating easy purchases/sales of stocks.
- Promotes economic growth: Foreign investment enables the flow of business development, infrastructure, and general economic development.
- Encourages corporate governance: FIIs financially invest in sound and transparent firms, increasing market standards.
- Market enhances stability: Long-term FIIs promote market expansion and stability. Strengthening currency.
Foreign capital flows contribute to strengthening the domestic currency by increasing demand.
Key Takeaways
A foreign institutional investor is a foreign entity that invests in a country's financial markets, introducing capital, liquidity, and economic growth. FIIs improve the stock market's performance, promote corporate governance, and stabilise currency value, but they also induce market volatility upon withdrawal of investment.
