Effect of Mutual Funds (MFs) Investments and Foreign Institutional Investors (FIIs) Investments on the Indian Stock Market: An Empirical Analysis

Abstract

Exploring the interwoven relationships between investment flows of Foreign Institutional Investors (FIIs),Mutual Funds (MFs) and Indian Stock Market, based on 16 years' time period analysis, this study is aimed at understanding the effects of these institutional investors on the Sensex and vice versa. These groups of domestic and foreign investors play an important role in the development of any stock market. Investor groups are believed to invest in equity markets based on the past returns and in turn are understood to influence the market movements. Johansen's co-integration test and Granger Causality test are made use of for analyzing the long term relationship and the cause and effect relationship between the investor groups and the Sensex. The investigation of these variables in the present study suggests a unidirectional flow of impact from Sensex to investments by investment groups supporting the literature that institutional investors make positive feedback trading as their main investment strategy in the equity markets. However, the reverse effect from the investments by these investor groups to the stock market movements is found to be missing