What Is Foreign Portfolio Investment (FPI)?
Foreign portfolio investment (FPI) includes securities and other financial assets held by foreign investors. It does not give investors direct ownership of a company’s assets and is liquid based on market volatility. Foreign direct investment (FDI) and foreign portfolio investment (FPI) are prominent investment methods in foreign economies. Most economies rely on FDI and FPI.
Foreign Portfolio Investment: Understanding
Portfolio investing is the passive investment of assets to obtain a return. Foreign-headquartered corporations’ stocks, ADRs, and global depositary receipts can be used in overseas portfolio investments. Holdings may include bonds, loans, mutual funds, or ETFs that invest in foreign assets.
Individual investors seeking international prospects are more likely to invest through an FPI. At a macro level, foreign portfolio investment is part of a country’s capital account and balance of payments (BOP). The BOP tracks international money flows throughout the year.
Foreign Direct Investment vs. FPI
Like portfolio investing, FPI investors do not actively manage their investments or the firms that issue them. Assets and enterprises are not under their control.
In contrast, foreign direct investment (FDI) enables investors to buy a foreign firm directly. Say a New York City investor buys a Berlin warehouse to lease to a German firm that needs more space. The investor wants long-term income and to boost corporate earnings.
Many FDI investors actively manage the firms they invest in. The investor builds the business and awaits ROI. Selling this interest is riskier and less liquid because the investor’s money is locked up in a corporation. Currency exchange risk lowers the investment’s value when converted from the country’s currency to the home currency, or U.S. dollars. Political risk might shake the foreign economy and his investment.
Pros
- Possible for regular investors
- Investment return faster
- Very liquid
Cons
- No direct investment management
- Volatile
- Removing causes economic upheaval
These risks influence international portfolio investments, albeit less than foreign direct investments. FPI investments are more marketable since they are financial assets, not property or corporate shares.
So, FPI is more liquid than FDI, giving investors a faster return or exit. FPI assets, like most short-term investments, are volatile. When there is uncertainty or bad news in a foreign country, FPI money leaves, worsening economic issues.
Foreign portfolio investments fit retail investors better than FDI, which suits institutional investors, ultra-high-net-worth people, and enterprises. However, large investors may employ overseas portfolio investments.
Foreign Portfolio Investment example
FPI was beneficial for India in 2018. Over 600 new SEBI-registered investment funds brought the total to 9,246. A more favorable regulatory environment and robust Indian equity performance in recent years attracted overseas investors.
Conclusion
- Foreign portfolio investment (FPI) entails holding foreign financial assets.
- FPIs can own stocks, ADRs, GDRs, bonds, mutual funds, and ETFs.
- FPI, along with FDI, is a frequent means for retail investors to invest abroad.
- Unlike FDI, foreign portfolio investment is passive ownership, and investors do not influence enterprises, property, or companies.
