An important feature of the development of stock market in India in the last 15 years has been the growing participation of Institutional Investors, both foreign institutional investors and the Indian mutual funds combined together, the total assets under their management amounts to almost 18% of the entire market capitalization.
This paper examines the role of these investors in Indian stock markets and finds that the market movement can be explained using the direction of the funds flow from these investors.
The Indian stock market has come of age and has substantially aligned itself with the international order. Over the last fifteen years the following developments have made the Indian stock markets almost on par with the global markets:
• Screen based trading systems replaced the conventional open outcry system of trading and everyone acclaims the contribution of the screen based trading in developing the culture of equity investing.
• The replacement of the fourteen-day account period settlement system give way to rolling settlements on T+2 basis has brought down the settlement risk
substantially.
• Dematerialization of securities
• Demutualization of exchanges
• Derivatives trading
In fact, today we have one of the most modern securities Market among all the countries in the world.
Along with these changes the market has also witnessed a growing trend of 'institutionalization' that may be considered as a consequence of globalization.
More precisely the growing might of the institutional investors entities whose primary purpose is to invest their own assets or those entrusted to them by others and the most common among them are the mutual funds and portfolio investors.
Today, giant institutions control huge sums of money which they move continuously. In European and Japanese markets, institutions dominate virtually all trading. In the US, retail investors still remain active participants.
An important feature of the development of stock market in India in the last 15 years has been the growing participation of Institutional Investors, both foreign institutional investors and the Indian mutual funds (since the pension funds are still restricted to fully participate in the stock market otherwise pension funds are big investors all world over).
With the accelerating trends of reforms Indian stock market will witness more and more of institutionalization and the increasing size of money under the control, this set of investors will play a major role in Indian equity markets.
The importance of institutional investors particularly foreign investors is very much evident as one of the routine reasons offered by market Pundits whenever the market rises it is attributed to foreign investors' money, no wonder we see headlines like "FIIs Fuel Rally" etc., in the business press.
This is not unusual with India alone as most developed economies of today might have seen a similar trend in the past.
The increasing role of institutional investors has brought both quantitative and qualitative developments in the stock market viz., expansion of securities business, increased depth and breadth of the market, and above all their dominant investment philosophy of emphasizing the fundamentals has rendered efficient pricing of the stocks.
This paper sets out with the objective of examining whether the institutional investors, with their war chests of money, set the direction to the market.
The next section briefly outlines the growth of institutional investors' presence in Indian stock market followed by an explanation of the data and methodology employed by the study and finally I present the results and discussions.
This paper examines the role of these investors in Indian stock markets and finds that the market movement can be explained using the direction of the funds flow from these investors.
The Indian stock market has come of age and has substantially aligned itself with the international order. Over the last fifteen years the following developments have made the Indian stock markets almost on par with the global markets:
• Screen based trading systems replaced the conventional open outcry system of trading and everyone acclaims the contribution of the screen based trading in developing the culture of equity investing.
• The replacement of the fourteen-day account period settlement system give way to rolling settlements on T+2 basis has brought down the settlement risk
substantially.
• Dematerialization of securities
• Demutualization of exchanges
• Derivatives trading
In fact, today we have one of the most modern securities Market among all the countries in the world.
Along with these changes the market has also witnessed a growing trend of 'institutionalization' that may be considered as a consequence of globalization.
More precisely the growing might of the institutional investors entities whose primary purpose is to invest their own assets or those entrusted to them by others and the most common among them are the mutual funds and portfolio investors.
Today, giant institutions control huge sums of money which they move continuously. In European and Japanese markets, institutions dominate virtually all trading. In the US, retail investors still remain active participants.
An important feature of the development of stock market in India in the last 15 years has been the growing participation of Institutional Investors, both foreign institutional investors and the Indian mutual funds (since the pension funds are still restricted to fully participate in the stock market otherwise pension funds are big investors all world over).
With the accelerating trends of reforms Indian stock market will witness more and more of institutionalization and the increasing size of money under the control, this set of investors will play a major role in Indian equity markets.
The importance of institutional investors particularly foreign investors is very much evident as one of the routine reasons offered by market Pundits whenever the market rises it is attributed to foreign investors' money, no wonder we see headlines like "FIIs Fuel Rally" etc., in the business press.
This is not unusual with India alone as most developed economies of today might have seen a similar trend in the past.
The increasing role of institutional investors has brought both quantitative and qualitative developments in the stock market viz., expansion of securities business, increased depth and breadth of the market, and above all their dominant investment philosophy of emphasizing the fundamentals has rendered efficient pricing of the stocks.
This paper sets out with the objective of examining whether the institutional investors, with their war chests of money, set the direction to the market.
The next section briefly outlines the growth of institutional investors' presence in Indian stock market followed by an explanation of the data and methodology employed by the study and finally I present the results and discussions.