Prices move because money moves, and the biggest money belongs to institutions. Foreign portfolio investors, mutual funds, insurance companies and pension funds together shape the direction of Indian equities far more than individual traders do. Before the session starts, many observers check GIFT Nifty to see how these participants may be positioned. During trading hours, those refreshing Nifty Today pages are often seeing the visible result of institutional buying or selling. Learning to read flow data can give you valuable context, and this article explains what the numbers mean and how to use them wisely.
Who Are the Big Players?
Foreign portfolio investors are participants who bring in overseas funds into Indian shares and bonds. Their decision to enter or exit the market is based on global liquidity, currency expectations and the relative attractiveness of emerging economies. When they are buying heavily, markets tend to rise, and when they are selling, they apply pressure.
Domestic institutions are mutual funds, insurers and retirement funds which have seen an amazing growth due to regular monthly investments into them by lakhs of households through systematic plans. This has given them a cushion of sorts which allows them to safely absorb heavier foreign selling as compared to earlier decades.
Proprietary desks, high-net-worth investors and retail participants form the third leg but institutional flows tend to take the lead.
Where to Find Flow Data
Exchanges and depositories report daily, provisional figures concerning the net buying or selling by foreign and domestic institutions in the cash market. Derivative segments indicate their positions in terms of index and stock futures and options.
It is better to look at the flow data over several days instead of a single day because a day of heavy selling may represent a balancing exercise but ten consecutive days of selling is a real bearish signal. Similarly, it is important to study the size of the flow as compared to overall turnover because a small figure in a very large market may not have much significance.
Interpreting the Signals
When foreign investors are selling while domestic institutions are buying, the market often moves sideways or falls slightly as one cancels the other out. When both parties are buying, rallies tend to be sharper and when both are selling, corrections tend to be steeper.
In the derivatives segment, one has to study the long/short ratio of foreign participants in case of index futures. Extremely high short positions by foreign investors can sometimes be a precursor to a sharp rally if and when they decide to square off their positions. Similarly, extremely skewed ratios in either direction should act as caution signals for investors.
Sector-level flows are also insightful as participants tend to find value in specific sectors like banking, capital goods or healthcare and buying activity in these areas can often provide clues on potential areas of growth for other investors.
Limitations to Remember
Flow data tends to be historical in nature and can only provide a rearview mirror perspective. Further, institutions can also make errors and blindly following their lead can cause losses as well. Their investment horizons can also vary from that of an individual investor and it is important to remember that they can sometimes be forced buyers or sellers depending on their redemption or mandate timelines.
Further, such funds may revise their data and final figures may vary from provisional ones and therefore it is important to look at trends rather than exact figures.
Practical Use for Ordinary Investors
For long-term investors, flow data tends to be a comfort as a period of heavy selling by foreign portfolio investors will not affect the fundamentals of good companies and therefore it is important to stick to systematic investing and use such a period to the advantage.
For active traders, it is important to utilise this data as a filter rather than a guide. Thus, one should avoid taking heavy long positions in the stock or index when big institutional players are heavy sellers and similarly take advantage of dips when big institutional players are buyers. However, it is important to remember to utilise price levels and risk management parameters alongside.
Understanding institutional behaviour should provide context rather than clarity and help an investor combine this behaviour with fundamental research, valuation acumen and a diversified portfolio to make better-informed decisions regardless of short-term fluctuations.
