Foreign Portfolio Investment: Meaning Benefits Types
Foreign Portfolio Investment is a popular, extensively covered term in leading finance portals and publications. Despite this wide coverage, it is still a term that confuses many, even seasoned investors. But considering that the volume of FPI is one of the primary indicators of the performance of the domestic stock market, it is imperative for every serious investor and trader to know the meaning of FPI.
To put it simply, FPI is a mode of investment that allows an investor to hold a significant amount of securities and assets in a foreign nation. In most cases, a foreign portfolio comprises different types of assets, including stocks, bonds, or mutual funds. This could also be termed as a way of investing in the foreign economy.
What is Foreign Portfolio Investment?
Portfolio investment in foreign countries involves the making and holding of a passive investment of securities, with an expectation to earn a lump-sum return. An individual investor who is interested in opportunities in other countries is more likely to invest in an FPI.
If you wish to know another simple definition of what foreign portfolio investment is, it can be described as a part of a nation’s capital amount, which is shown on its BOP (balance of payments). And the BOP measures the sum total of the amount that flows from one country to another over one financial year.
FPI is, as mentioned above, one of the major determinants of the stock market’s performance. Additionally, it ensures a balance between the price of a stock and its value, thereby enhancing the efficiency of the market.
How is FPI Different from FDI (Foreign Direct Investment)?
Now that you know what foreign portfolio investment is, it’s time for you to understand the difference between FPI and FDI (Foreign Direct Investment).
In FDI, an investor shows interest in building a direct business overseas. This foreign business could be a manufacturing unit or a warehouse. FDI can also lead to the transfer of knowledge, resources and funds, and often involves a JV (joint venture) or a subsidiary setup.
FDI is meant for long-term investments, whereas FPIs are for short-term. Mostly, the Foreign Direct Investments are taken up by venture capital businesses and institutions.
If we relate the stock market with FPI, it involves the buying of bonds and shares which are made available in a foreign nation’s exchange. FPI is a liquid investment and hence, can be bought or sold without any hassles. The FPI investors are usually passive; however, FDI involves active investors. Together with FDI, foreign portfolio investments are one of the easiest ways of investing in a foreign country.
Types of Foreign Portfolio Investment (FPIs)
On the basis of their risk profiles, FPIs are categorised into three parts:
- Category 1 (low-risk): This category concerns the government or government-related institutions like international agencies and central banks; for example, an SWF (sovereign wealth fund) maintained by the state or its divisions.
- Category 2 (moderate-risk): This category includes insurance companies, mutual funds, banks, pension funds and alike.
- Category 3 (high-risk): The last category involves all other FPIs which are not a part of the first two categories mentioned above. They, for example, may include charitable trusts or societies, among others.
Benefits of Foreign Portfolio Investment
- International Credit: With FPIs, investors can get access to an increased amount of credit in foreign nations. This way, they can even broaden their credit base. So, in case his domestic credit score is less or unfavourable, having an international credit score could be beneficial.
- Access to a Superior Market: At times, foreign markets are less competitive than domestic ones. Therefore, FPIs can give an investor exposure to a wider market. Which also can lead to higher returns and greater diversities.
- Higher Liquidity: FPIs provide high liquidity. An Investor can trade in foreign portfolios quite seamlessly. This allows them to have the power of investing whenever better opportunities arise.
FPIs are generally made by the ones who are interested in having a diversified portfolio by trading in bonds, shares, mutual funds or other assets in a foreign land. FPIs are significant as they drive the share markets and boosts the liquidity of capital markets of the hosting nations.
Also Read: Foreign Exchange Market
And now that you’ve got an idea about FPIs, you could easily consider investing in a foreign economy to diversify your investment portfolio.
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Frequently Asked Questions
Yes, FPIs offer investors to involve in borrowing or lending in agreement with the Securities Lending and Borrowing program of SEBI.
Yes, they can.
Yes. They can be registered under Category 3 (high-risk) of FPIs.
No. The registration could be granted by any DDP (designated depository participant) other than SEBI.