Impact of Fdi Fpi and Mutual Funds On Ni PDF

International Journal of Research in Economics and Social Sciences (IJRESS)
Available online at: http://euroasiapub.org

Vol. 8 Issue 1, January- 2018
ISSN(o): 2249-7382 | Impact Factor: 6.939 |
IMPACT OF FDI, FPI AND MUTUAL FUNDS ON NIFTY STOCK RETURNS
Ms. Parul Kumar1

Assistant Professor
Maharaja Agrasen Institute of Management Studies
Ms. Rupal Saini2

B.COM(H) – Final Year Student
Vivekananda Institute of Professional Studies, Delhi
Abstract
FDI & FPI are becoming an important source of finance in developing countries including India. In
India, the top three investor classes are Foreign Portfolio Investment, Foreign Direct Investment,
and the Mutual funds. The current study explores the relationship between Mutual Funds, Foreign
Portfolio Investors, Foreign Direct investment, and the nifty returns by way of regression analysis.
In this paper, the impact of all these variables is collectively analyzed on the nifty returns for the
period of 2012 – 2016. Finding highlighted that Nifty returns are affected by FDI, FPI and the
mutual funds as well its own lagged value and that of mutual funds. The study also concluded that
Nifty returns impact foreign portfolio investment coming to India. Mutual funds are seen
impacting the FDI but not the FPI to India. Overall all the variables are together significant in
impacting each of the other variables with the highest impact on nifty returns as compared to
other investments.
Keywords: Regression, Mutual Fund, Foreign Portfolio Investment, Foreign Direct Investment,
Asset under custody.
International Journal of Research in Economics & Social Sciences 345

Email:- editorijrim@gmail.com, http://www.euroasiapub.org
(An open access scholarly, peer-reviewed, interdisciplinary, monthly, and fully refereed journal.)
ISSN(o): 2249-7382 | Impact Factor: 6.939
Introduction
With the economic reforms of 19, greater and better avenues to attract the foreign funds in the
Indian stock market have been opened. Foreign investment is an investment which flows from
one country into the other. Foreign investors invest in India through capital market route i.e.
buying shares of firms. Reserve Bank of India (RBI) allowed Securities and Exchange Board of
India (SEBI) to register Foreign Institutional Investment to invest in the primary and secondary
capital markets in India through the portfolio investment scheme. Since 2014 regulation, Foreign
Institutional Investors are now known as Foreign Portfolio Investment (FPI). The investments
made by non-residents in Indian shares, government bonds, corporate bonds, convertible
securities, infrastructure securities and others is known as FPI. Foreign Direct Investment (FDI)
is an investment made in one country in business interests of another country by a company or
individual. With unparalleled globalizations, countries have witnessed double digit economic
growth which in turn resulted in fierce competition and expedited innovation. Hence due to this
surge in many countries, the inflow of Foreign Direct Investments has become an extraordinary
measure of economic development. Through FDI in India, foreign companies invest directly in
fast-growing private Indian businesses to take benefits of cheaper wages and changing business
environment. A Mutual Fund (MF) is a pool of money from various investors who wish to save or
make money. Investing in a mutual fund can be a lot easier than buying and selling individual
stocks and bonds. In this, money is collected from various investors and then clubbed together for
investing in capital market instruments such as shares, debentures and other securities. The
income earned through these investments and the capital appreciations realized are shared by
the unit holder in proportion to the number of units owned by each of them. The mutual fund
enables a common man to invest in a diversified and professionally managed basket of securities,
at a relatively low cost.
Investments by the FPIs are termed as the critical component of the Indian economy while the
mutual funds, insurance companies, hedge funds and other domestic institutional investors
channelize the domestic savings into the financial market. Mukherjee and Roy (2011) concluded
that FPI and Mutual fund’s trading pattern are different. Above and beyond, institutional
investment activities are expected to play a significant role to influence the financial market, as
well as the macro economy as a whole and the stock market movement, is thought to be driven by
the trading behavior of institutional investors (Naik & Padhi, 2014).
In the light of the discussion above, this study is to analyze the relationship between FDI, FPI, MF
and also Insurance companies and their impact on Nifty returns. The structure of the paper is as
follows: the Introduction is followed by literature review, then by research methodology. The last
two sections deal with analysis and conclusion respectively.

Literature Review
Most of the studies in this area analyzed the particular relation among the FPI and the returns;
FDI and returns and likewise Mutual funds and returns. There is a dearth of studies covering all
the variables together i.e. the impact of these investments collectively on the nifty returns.
Warther (1995) studied the relationship between aggregate mutual fund cash flows and security
returns. The study concluded that aggregate security returns were highly correlated with
concurrent unexpected cash flows into mutual funds but unrelated to concurrent expected flows.
Results of the study supported the popular belief that fund inflows and returns were positively
related. However, the results rejected both sides of a feedback trading model, which means that
security returns neither lag nor lead mutual fund flows. Fortune (1998) used VAR models to
examine the relationship between fund flows and returns. The study concluded the evidence of
positive correlation between fund flows and contemporaneous returns. The researcher concluded
the existence of feedback trading. The results of Fortune (1998) are in strong contrast with the
conclusions of Warther that flows do not appear to be affected by past security returns.
Kumar (2001) investigated the effects of FPI inflows on the Indian stock market represented by
the Sensex using monthly data from January 1993 to December 1997. With Sensex as the
dependent variable the lag of one month of NFI became significant, i.e. there was causality from
FPI to Sensex. Mukherjee, Bose, and Coondoo (2002), explored the relationship of foreign
institutional investment flows to Indian equity market with its possible covariates. The study was
based on daily data for the period Jan. 1999 to May 2002. Correlation and Regression were used
to analyze the relationship, and by employing Granger Causality Test, the result stated that the
FPI net inflows correlate with the return in Indian equity market. The study also revealed that in
the post-Asian crisis, return in the Indian capital market was the sole driver of the FPI inflows.
Also, during the pre-Asian crisis period, other covariates were also found to be correlated with
FPI net flows. Pal, (2005) investigated the effect of withdrawal of foreign portfolio capital in the
post-election phase on the price and equity holding pattern of different Sensex companies. The
study found that the FPIs were the major players in the domestic stock market in India, and their
influence on the domestic markets was also growing. The study also concluded that FPI had high
control of the companies listed on Sensex. Babu & Prabheesh (2008) found that there existed a bi-
directional causality between FPIs investment and stock returns between Jan 2003 – Feb 2007.
With the help of VAR and Granger Causality test, the researcher concluded that FPIs investment
flows were more stock return driven. Rajput & Thaker (2008) analyzed the relation between FPI
investments and NIFTY performance. The study found that the Nifty returns were significantly
affected by the FPIs and also they were one of the principal driving forces of the stock market. The
study also proved that FPI and Nifty have a positive correlation and there were other factors also

which affected Nifty returns. Sehgal and Tripathi (2009) compare the investment behavior of
domestic mutual funds and FIIs and conduct a causality analysis between stock market return and
institutional fund flows, separately, using monthly data. The study concluded that while returns
cause FIIs inflows, no causal relationship exist between FIIs outflows and stock market returns. It
was also found that while FII inflows cause domestic mutual fund flows, a feedback relationship
exists between FII outflows and mutual fund outflows. This study concluded that domestic
institutional investors react late to the market movement as compare to FIIs.
Using daily data Mukherjee and Roy (2011) also compare the investment behavior of mutual
funds and FIIs. The study found that mutual funds influence the decision of FIIs when they invest
in equity whereas FIIs decision is opposite to mutual funds. Results also indicated unidirectional
causality from stock market returns to FII investment, and bi-directional causality existed
between mutual fund investment and stock market returns. Paliwal and Vashishtha (2011)
estimated the direction of causality between FPI and BSE returns with Granger causality test. The
study found that there was a positive correlation between FPI and BSE returns and both FPI and
BSE Granger cause each other. Bose (2012) examined the impact of mutual fund flows, and FIIs
fund flows collectively on the stock market returns for 2008 to 2012. The study found a negative
relationship between net investment of mutual funds and FIIs. Also, there was the existence of
unidirectional causality from FII investment to mutual funds investment. The study also
concluded that stock returns were impacted by its own past values and lagged FIIs investment but
not by mutual funds. Sultana & Pardhasaradhi (2012) found a significant impact of the flow of FDI
& FPI on Indian stock market. The study also concluded that there was a significant strong positive
correlation between FDI & Sensex and FDI & Nifty. Moderate positive correlation between FPI &
Sensex and FPI & Nifty was found although that was insignificant. Kapoor & Sachan (2015)
analyzed the trend and patterns of FDI & FPI along with their impact on SENSEX and Nifty. The
study found a weak positive correlation between FDI & Sensex and FDI & Nifty while strong
positive correlation was found between FPI & Sensex and FPI & Nifty.
The current study explores the relationship between Mutual Funds, Foreign Portfolio Investors,
Foreign Direct Investment, Insurance companies and the nifty returns in the light of the literature
highlighted above. This study is an extension of the previous studies as here all the investments
are taken together to investigate the impact on returns. Also, the impact of lag relationship along
with highlighting the impact of nifty returns on all the variables is studied in the present paper.
Objectives
1. To analyze the patterns and trends of FPI, FDI, and Mutual Funds companies in the Indian
market.

2. To study the impact of the FPI, FDI, and Mutual Funds on Nifty returns.
3. To investigate the impact of Nifty returns on the FPI, FDI, and Mutual Funds.
Research Methodology
The present study analyzes the impact of FDI, FPI and Mutual Funds on Nifty Stock Returns. Nifty
Return is taken into account because it is one of the most popular indices of Indian Stock Market.
FPI, FDI, and Mutual Fund investment have been collected from National Securities Depository
Ltd (NSDL) website. The frequency of the data is monthly, and it starts from 2012 – 2016. Nifty
returns have been taken from National Stock Exchange website.
To test the series for the absence of unit root, Augmented Dickey-Fuller test has been used.
Regression has been applied to analyze the relationship between the variables as well as their
lagged terms. All the models are tested for absence of autocorrelation, heteroscedasticity &
multicollinearity by way of Breusch Pegan Godfrey method, Serial correlation LM test & Variance
Inflationary Factor (VIF).
Analysis & Findings

To study the objectives mentioned above the analysis is structured in three sections. The first
section highlights the pattern and the trend in the various types of investments i.e. FPI, FDI, and
MF. Second section focus on analyzing the impact of variables on the Nifty returns by way of
building a Regression model. The last section highlights the impact of nifty returns on FPI, FDI,
and MF.
Chart 0: Comparison of %AUC of FPI with other Players in respect to Investment in Equity
70.0% FPI-Equity
Insurance-Equity
60.0% MF-Equity
FDI-Equity
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16
Month & Year

The size and robustness of FPI’s role in Indian capital markets can be better understood by looking
at the assets in their custody as contrasted to other institutions and participants. Chart 1 amplifies
that the percentage shares of assets under custody (AUC) in equity, of major custodians namely
FPIs, mutual funds, Insurance Companies and Foreign Direct Investment. It emphasizes the fact
that FPIs have been the largest custodian of assets having their share ranging from 41 % to 65%
during 2012 to 2014. Although the share of FPIs has been fluctuating, yet their position in the
Indian capital market remained dominant as contrasted to other custodians.
Chart 2: Total % AUC of FPI as compared to Major players

60.0% FPI Insurance
MF FDI
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16
Chart 2 explains the total percentage of assets under custody in several months starting from
January 2012 till January 2017 by the major players in the Indian market. Out of the total
investment made by all the category of investors on an average 40% of the investment came only
from the foreign portfolio investors, hence making them the major players in the Indian markets.
It can also analyze from the chart that in almost all the sample years, the investment by FPIs was
the highest & above 32%.
After analyzing the past & present trends in the asset under custody by a various group of
investors, the next section focuses on the analyzing the impact of these investments on the Nifty
returns. Table1 shows the stationarity test results of all the variables by ADF test. All the variables
are stationary at level (significant t statistics at 5% level of significance).

Table 1: ADF test results

Variables Description At Level
t statistics
Nifty _ R Nifty Returns -8.127696*
FDI Foreign Direct Investment -8.852813*
FPI Foreign Portfolio Investment -6.961252*
MF Mutual Funds -7.474324*
IC Insurance Company -7.982036*
Source: Author Calculations
In the light to analyze the impact of FDI, FPI, and MF on the nifty returns regression modeling has
been used. Table 2 presents various models which highlight the relationship and impact of
variables on the Nifty returns. All the models were checked for seasonality and heteroskedasticity
and hence are found to be homoscedastic and not serially correlated. The first model presents the
impact of all the variables along with their lagged terms on the nifty returns. The value of R square
shows that the model explains 96.7% level of the variation for Nifty. Nifty lagged term significantly
impacts nifty returns along with the Foreign portfolio investment, Mutual funds, mutual funds last
three months lagged terms. The impact of FPI and MF is positive as against the adverse impact of
lagged nifty returns and the lagged mutual funds. FDI has no significant impact on the nifty
returns. Significant F statistic suggested that all the variables collectively impact the nifty returns
and also model has a good fit.
Model II, III, and IV explain the relation among the variables, and this has been done by way of
multiple regression analysis on the variables as well as their lagged terms. In Model II, FDI is
regressed on Nifty returns, Mutual Funds, FPI and lagged terms. FPI, MF, and their lagged terms
are positive significant in impacting the FDI coming to India. FDI is impacted negatively by its last
two months lagged terms and also nifty’s last two months returns. Overall variables can explain
50.58% of the variations in the FDI.

Table 2: Results of Multiple Regression

Model I Model II Model III Model IV
Variable Nifty_R FDI FPI MF
C -0.199791* -10.95419* 0.303520 0.132284
NIFTY_R - - 1.022701* 0.419352
NIFTY_R(-1) -0.131385* -9.222670* - -
NIFTY_R(-2) - -13.27216* - -
FDI -0.001830 - -0.004987 -0.005262
FDI(-1) - -0.824397* -0.010749* -
FDI(-2) - -0.364989* - -
FPI 0.716733* - - 0.462873*
FPI(-1) - 8.534409* 0.147219* -0.299765*
FPI(-2) - 12.36242* - -0.197833
FPI(-3) - -2.942831* - -
MF 0.197302* 1.945219* 0.073857 -
MF(-1) - 1.860889 - 0.388043*
MF(-2) -0.052719* - - 0.370199*
MF(-3) -0.074741* - - -
R-squared 0.967083 0.594024 0.948916 0.893975
Adjusted R-squared 0.959927 0.505768 0.943021 0.871416
F-statistic 135.1435 6.730716 160.9878 39.62905
Prob(F-statistic) 0.000000 0.000002 0.000000 0.000000
Source: Author Calculations
Model III highlights that nifty returns and FPI’s last month investment positively impacts the
foreign portfolio investment coming to India. Last month FDI investment negatively impacted the
FPI, but the magnitude is less as compared to the variables. The most prominent factor in
attracting FPI to India is nifty returns as compared to the others. Mutual funds are insignificant in
impacting FPI investment to India. Overall the model predictability is good with 94.30%
explanation of variation in the foreign portfolio investments. Model IV shows the relationship
between mutual funds and other variables. FPI positively and one month lagged FPI negatively
impact the mutual funds. Mutual funds are affected by its two months lagged flows. Overall the
model is a good fit as the f statistic is significant at 5% level of significance. 87% of the variations
in the mutual funds are explained by all the variables together.

Conclusion
The study is to analyze the relationship between FPI, FDI, MF and the Nifty returns. Majorly earlier
studies focused on analyzing the only relation of the different types of investments with the nifty
returns. The study concluded that FPI and Mutual Fund positively impacts the nifty returns. Three
months lagged mutual funds flow and one month lagged nifty return negatively impacted the nifty
returns. Other model established the relationship between all investment types with nifty returns
seen impacting the Foreign portfolio investments only. The lagged nifty returns negatively
influence the FDI coming to India; hence there is an existence of an inverse relationship among
them. The study also observed that FDI investment in India is positively influenced by the FPI
coming to India along with the last two months FPI. FDI shares a negative relation with its lagged
terms and positive relation with the Mutual Fund investment. With regard to mutual funds, only
FPI and mutual funds own lagged values have impacted the investment. All the models have the
proper fit with significant f statistic as well as the explanation power of the variation in dependent
variable by the independent variables together is quite high.
References
Babu, M. S., & Prabheesh, K. (2008). Causal relationships between Foreign Institutional
Investments and stock returns in India. International Journal of Trade and Global
Markets, 1(3), 259-265.
Bose, S. (2012, September). Mutual Fund Investments, FII Investments and Stock Market
Returns in India. ICRA Bulletin-Money & Finance, pp. 89-110.
Fortune, P. (1998). Mutual Funds Part II: Fund Flows and Securities Returns. New England
Economic Review, 3-22.
Kapoor, D. S., & Sachan, R. (2015, April). Impact of FDI & FPI on Indian Stock Markets.
International Journal of Research in Finance and Marketing, 5(4), 9-17.
Kumar, P., Gupta, S. K., & Sharma, R. (2016, July). Risk- Return Analysis of Mutual Fund Equity
Growth Schemes. Journal of Exclusive Management Science, 5(7), 32-48.
Kumar, S. (2001). Does the Indian Stock Market Play to the tune of FII Investments? An
Empirical Investigation. ICFAI Journal of Applied Finance, 7(3), 36-44.
Mukherjee, P., Bose, S., & Coondoo, D. (2002, Apr - Sep). Foreign Institutional Investment in the
Indian Equity Market: An Analysis of Daily Flows during January 1999-May 2002. Money
& Finance, pp. 21-51.

Mukherjee, P.; Roy, M. (2011). The nature and determinants of investments by institutional
investors in the Indian stock market. Journal of Emerging Market Finance, 10(3), 253-
283.
Naik, P. K., & Padhi, P. (2014, August 2). The Dynamics of Institutional Investments and Stock
Market Volatility: Evidence from FIIs and Domestic Mutual Funds Equity Investment in
India. Munich Personal RePEc Archive (MPRA), pp. 1-30.
Pal, P. (2005). Recent Volatility in Stock Markets in India and Foreign Institutional Investors.
Economic & Political Weekly, 40, pp. 765-772.
Paliwal, M., & Vashishtha, S. (2011). FIIs and Indian Stock Market: A Causality Investigation.
Comparative Economic Research, 14(4), 5-24.
Rajput, A., & Thaker, K. (2008). Exchange Rate, FII and Stock Market Index. Vlakshan, XIMB
Journal of Management, V(I), 43-56.
Sehgal, S., & Tripathi, N. (2009, January - March). Investment Strategies of FIIs in the Indian
Equity Market. VISION-The Journal of Business Perspective, 13(1), 11-18.
Sultana, D. S., & Pardhasaradhi, P. S. (2012, July). Impact of Flow of FDI & FII on Indian Stock.
Finance Research, 3, 4-10.
Warther, V. (1995). Aggregate Mutual Fund Flows and Security Returns. Journal of Financial
Economics, 39(2), 209-223.


Impact of Fdi Fpi and Mutual Funds On Ni PDF

Загружено:

Сведения о документе

Исходное описание:

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Impact of Fdi Fpi and Mutual Funds On Ni PDF

Загружено:

Авторское право:

Доступные форматы

International Journal of Research in Economics and Social Sciences (IJRESS)

Available online at: http://euroasiapub.org

IMPACT OF FDI, FPI AND MUTUAL FUNDS ON NIFTY STOCK RETURNS

Ms. Parul Kumar1

Ms. Rupal Saini2

International Journal of Research in Economics & Social Sciences 345

International Journal of Research in Economics & Social Sciences 346

International Journal of Research in Economics & Social Sciences 347

International Journal of Research in Economics & Social Sciences 348

Analysis & Findings

International Journal of Research in Economics & Social Sciences 349

Chart 2: Total % AUC of FPI as compared to Major players

International Journal of Research in Economics & Social Sciences 350

Table 1: ADF test results

International Journal of Research in Economics & Social Sciences 351

Table 2: Results of Multiple Regression

International Journal of Research in Economics & Social Sciences 352

International Journal of Research in Economics & Social Sciences 353

International Journal of Research in Economics & Social Sciences 354

Вам также может понравиться