What is the role of FII (Foreign Institutional Investors) in Indian Share Market and how do they make a big difference in the valuation of the Indian Share Market?

General
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Foreign Institutional Investors or FIIs are funds or investment firms that are from outside the country in which they are investing. In the context of the share market, the FIIs may include Foreign Mutual Funds, Pension Funds, Insurance Companies, Hedge Funds, etc.

Foreign Institutional Investors play an important role in the share markets because of their heavy investment capacity. They are generally cash rich and look for good avenues to invest their money.

They bring in lot of advantages to the share market

  1. FIIs pump in a huge money in a company share, thereby increasing the valuation of the company and increasing the demand for the company share

  2. More the FIIs invest in a particular company share, a positive sentiment prevails in the market on the share, thereby increasing the demand

FIIs investment in a share comes with its own share of downsides

  1. Even though FIIs investment in a share increases its visibility and valuation, it makes the share tightly coupled with the global investors and makes it more vulnerable to global cues

  2. In general, factors like currency rate or political sentiments or economic factors or policy changes in a foreign land do not impact the valuation of a share in the local market.

However, if there is a huge involvement from FIIs from any of the countries where the political environment or the economic environment is not stable or if there is a major shift, it will have a big chain effect on the share in which the FII has invested.

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