India Sensex volatility - mutual funds vs fii

India mutual fund companies and foreign institutional investors (FII) appear to have been betting in opposite directions for most of the recent Sensex growth.

ETIG data highlights this trend:

• When Sensex jumped from 14,000 to 15,000, FII sold shares (net sales) worth 2372.10 crores while Indian mutual fund companies bought shares worth Rs 2891 crores
• Between 15000 and 16000, FII bought shares worth Rs 7307 crores while Indian mutual funds bought only Rs 667 crores
• When Sensex moved from 16000 to 18000, FII bought shares worth Rs 24,372.3 crores while mutual fund companies sold (net sales) Rs 2182.21 crores
• Between 18000 and 19000, FII bought Rs 7378.2 crores worth shares while mutual funds sold (net sales) Rs 966.2 crores worth of shares
• Finally, when Sensex jumped from 19000 to 20000, FII sold (net sales) Rs 1281.1 crores worth of shares while Indian mutual funds bought shares worth Rs 1515 crores.

Question arises as to why two groups of well researched/informed institutional investors have bet on opposite sides in a stock market that has grown to dizzying heights in a matter of months.

It appears, that mutual funds companies in India expected a correction in Sensex when the US sub-prime crisis hit in August - therefore they preferred to lower exposure. While some market commentators expected FII money running away from the US sub-prime mess to come to emerging markets, the relative deluge in to India surprised many a mutual fund pundit ! Domestic mutual funds, who were cashed up, now appear to want to get into the market so as to meet performance hurdles. Interestingly, FII money in the latest run up, seems to be going the other way.

All said and done, while an investor may be able to make some money purely playing momentum, longer term players would be better off considering fundamentals of the company closely while trying to leverage momentum plays. However, if leading institutional investors see fundamentals of blue chips in India so differently, what chance does a retail investor have ?