"The strong inflow from the FIIs over the past five years has resulted in the all-time high FII ownership of the domestic markets at 22.5 percent as of end June," Bank of America Merrill Lynch said in a report today.
As of end June, FIIs collectively held around 22.5 per cent of the market and nearly 46 per cent of the free float. This compares with around 15 per cent of total market cap and 36 per cent of free float in March 2009, it said.
However, the report said, "the top three stocks by value owned by FIIs remained the same - HDFC Ltd, ICICI Bank and Infosys Ltd. The top three overweight stocks are ICICI Bank, HDFC Bank and Tata Motors".
HDFC Bank is a new entrant given the reduction in MSCI weight.
"The financials have been the biggest overweight for FIIs for a long time. However, the overweight in financials has seen a massive jump at 10.5 times (it is now 10.5 per cent) due to reduction in MSCI weight of HDFC Bank due to FII restrictions," the report said.
Within financials, however, the government-owned banks are not well held as State Bank of India is under-owned. The report said the domestic mutual funds have seen positive inflows and have been buyers post-elections after being net sellers for past few months.
The top four underweight stocks for both FIIs and domestic MFs are the same - HDFC, Reliance, TCS and Infosys. Software and energy are the largest sector underweights for FIIs.
"The under-weight on energy is largely driven by Reliance, similar to the FIIs," BofAML said, adding unlike FIIs, the biggest sector overweight for domestic funds is industrials, where they have a massive 950 basis points overweight.