The main and obvious reason why small investors -- individuals who purchase small amounts of securities for him/her -- tend to blindly follow the investment strategies of large foreign institutional investors (FIIs) and domestic institutional investors (DIIs) is because they rely on the claimed reputation of the foreign investors that they are more and better informed than the average investor.
Local and foreign investors not only differ in these activities but also when it comes to choosing certain stocks.
This makes the exercise of choosing stocks very difficult for small investors who follow institutional investors, but some experts have said retail investors must understand that institutional players do not have a clichéd or set approach to investing. For instance, if ITC and L&T happen to be the current favorites of DIIs because they are overweight on those stocks, FIIs won’t even bother looking at them. Hence, retail investors would do well if they first understand what drives the stock picking strategy of FIIs and DIIs.
Stock picking strategy: FIIs tend to prefer companies with diversified ownership and professional management, while domestic institutions like rallying behind companies that have withstood the test of time and have given out good returns consistently.
Sometimes, due to macro headwinds and strong competition from other foreign players, some stocks are not popular with FIIs, but at the same time mutual funds (MFs) bet on those same stocks because they have provided long-term returns. FIIs also react much faster to macro headwinds because at times they can have short-term horizons.
FIIs give more importance to professional management than to the price-earnings ratio of a stock. They tend to go with expensive stocks even when other cheaper options are available because of the quality of management in the former.
Choice is also another determining factor for FIIs because they have a much greater choice while choosing stocks as opposed to DIIs. Further, regarding investments in long-term focused funds, fund managers of FIIs often take their decisions from a foreign location which prompts them to play safe instead of over-indulgence in choice of stocks.