Equity investment may have become riskier for retail investors, with FIIs holding almost half the free float (non-promoter holding) of the market. Foreign institutional investments in India hit a new peak in the December quarter with inflows of over $2 billion. It was the ninth consecutive quarter of positive FII flows. In January, FIIs bought shares worth $2.1 billion (₹12,919 crore).
Strong inflows over the last five years have resulted in an all-time high foreign ownership in Indian companies. As of December 2014, FIIs collectively held 23 per cent of the market and 47 per cent of the free float. This compares with 15 per cent of the total market cap and 36 per cent of the free float in March 2009.
It is feared that FIIs, known to move money rapidly across the globe seeking investment opportunities, may hit the exit even if there is a small unfavourable proposal in the Union Budget. This can hit the market, and, in turn, retail investors, especially badly.
The overweight position of global emerging markets funds and the consensus bullishness create a big risk to markets, said Jyotivardhan Jaipuria, Research Analyst, DSP Merrill Lynch, in a report. However, the good news is that domestic mutual funds have seen substantial inflows and have been buyers post elections. Fund flows into domestic MFs have remained positive for the last nine months, a trend not seen in 15 years.
Continuous buying of financial stocks has made the sector most sought-after for foreign investors. SBI and HDFC were the preferred choice.
After betting big on information and technology companies, FIIs turned underweight on the sector largely due to weak prospects. The three large software companies — Infosys, TCS and Wipro — were among the Top 10 stocks in the sector.
Foreign investors reduced their investments further in the pharma sector. The top underweight stocks for FIIs and mutual funds were HDFC, Reliance Industries, TCS and Infosys.
Though the market has turned expensive with FIIs pumping in big money, analysts expect it to be driven by future earnings from here on.
The sharp fall in crude prices and the expectation of lower interest rates should help corporates post better earnings, said Adesh Gupta, an independent research analyst.