Vol: 2, Issue: 1 2012

Page: 079-085

Portfolio Preferences of Foreign Institutional Investors

Chandrashekar M. Mathapati

The Economic Development of any country depends upon the existence of well-organized financial markets. It is the financial system, which supplies the necessary financial inputs for the production of goods and services, which in turn promote the well being and standard of living of the people of a country. Capital Market are of crucial significance to capital formation as the main function of these markets is the mobilization of savings and their distribution for the industrial investment, thereby stimulating the capital formation and to that extent, accelerating the process of economic growth. The opening up of the capital markets in emerging market countries have been perceived beneficial by some researchers while others are concerned about possible adverse consequences such as contagion. Clark and Berko (1997) emphasize the beneficial aspects of allowing foreigners to trade in stock market and outline the “Base-broadening” hypothesis. The perceived advantages of the base-broadening arise from an increase in the investor’s base and the consequent reduction in risk premium due to risk sharing. The theory behind the base-broadening hypothesis suggests that the expansion of investor’s base include foreign investments that lead to increase diversification followed by reduction in risk and consequently lowering the required risk premium. This study is descriptive and experimental in nature as the effect of certain events or actions have been observed in it objectively and by distinguishing the effect of extraneous variables.