Why Indian Investors Shouldn't Panic Over FII Selling—A Fundamentalist’s Perspective (Part 2)

Why FII Selling Doesn't Mean You Should Sell If analysts can be wrong, why assume that Foreign Institutional Investors (FIIs) are always right? The reasons FIIs buy or sell Indian stocks are completely different from the reasons you invest. FIIs evaluate Indian stocks using different parameters because their cost of equity is higher than yours. Here’s why: An Indian investor’s cost of equity is mainly determined by: Risk-free rate + Beta + Market Risk Premium FIIs, on the other hand, add two more variables: Risk-free rate + Beta + Market Risk Premium + Country Risk Premium + Currency Risk For example, if your discount rate (Ke) for a stock is 12%, an FII’s could be 15% or more due to additional risks like currency fluctuations and geopolitical concerns. This 3% difference can drastically change a stock’s valuation when using discounted cash flow models. This is why FIIs have been selling for the last four years— not necessarily because Indian stocks are bad, but because their valuation models demand higher discounts than ours. So, Should You Ignore FII Selling Completely? Not exactly. The best approach is to focus on your own investment thesis. If you believed in a company’s fundamentals when it was at an all-time high, and nothing has changed except the stock price, then systematic investing (SIP-style buying) is the best strategy. Market reversals are unpredictable. But great stocks always get their due—sooner or later. Stay invested, stay rational, and let fundamentals guide your decisions.