Why are mutual funds reducing their stake in Reliance while FIIs are increasing their stake?

What you are saying is correct but that is not because mutual funds are negative about it. I will explain the reason but you are right on the FII front. They have actually hiked their stake in Reliance to the highest level in history.

In short, Reliance may be gradually getting over-owned by foreign portfolio investors as FPI holding in Reliance Industries touches a record 27.2% in the Sep-20 quarter. As of the end of September, foreign portfolio investors held 165.8 crore shares representing 25.2% stake.

Apart from this stake held by FPIs, qualified institutional buyers or QIBs also held another 2.05% stake in the company. On a quarterly basis, the FPI stake in RIL went up by 60 bps from 26.6% to 27.2%. This is the highest that FIIs have held in RIL in the all these years.

On the other hand mutual funds reduced their stake in Reliance Industries in the quarter by 25 basis points. From holding 5.37% at the end of June 2020, the FPIs are now holding 5.12% in Reliance Industries as of the end of September 2020.

However, this is more due to statutory reasons. Most of the mutual funds are approaching the statutory 10% limit of corpus that they can invest in a single stock. In the last few quarters, MFs had pushed their stake in most funds close to that level. This has been a bone of contention among MFs as it forces them to underperform the Nifty due to Kurtosis.