What Is Foreign Portfolio Investment (FPI)?
Foreign portfolio investment (FPI) consists of securities and other financial assets held by investors in another country. It does not provide the investor with direct ownership of a company's assets and is relatively liquid depending on the volatility of the market. Along with foreign direct investment (FDI), FPI is one of the common ways to invest in an overseas economy. FDI and FPI are both important sources of funding for most economies.
Key Takeaways
- Foreign portfolio investment (FPI) involves holding financial assets from a country outside of the investor's own.
- FPI holdings can include stocks, ADRs, GDRs, bonds, mutual funds, and exchange traded funds.
- Along with foreign direct investment (FDI), FPI is one of the common ways for investors to participate in an overseas economy, especially retail investors.
- Unlike FDI, FPI consists of passive ownership; investors have no control over ventures or direct ownership of property or a stake in a company.
Understanding Foreign Portfolio Investment (FPI)
Portfolio investment involves the making and holding of a hands-off—or passive—investment of securities, done with the expectation of earning a return. In foreign portfolio investment, these securities can include stocks, american depositary receipts (ADRs), or global depositary receipts of companies headquartered outside the investor's nation. Holding also includes bonds or other debt issued by these companies or foreign governments, mutual funds,or exchange traded funds (ETFs) that invest in assets abroad or overseas.
An individual investor interested in opportunities outside their own country is most likely to invest through an FPI. On a more macro level, foreign portfolio investmentis part of a country’s capital account and shown on its balance of payments (BOP). The BOP measures the amount of money flowing from one country to other countries over one monetary year.
FPI vs. Foreign Direct Investment (FDI)
With FPI—as with portfolio investment in general—an investor does not actively manage the investments or the companies that issue the investments. They do not have direct control over the assets or the businesses.
In contrast, foreign direct investment (FDI) lets an investor purchase a direct business interest in a foreign country. For example, say an investor based in New York City purchases a warehouse in Berlin to lease to a German company that needs space to expand its operations. The investor’s goal is to create a long-term income stream while helping the company increase its profits.
This FDI investor controls their monetary investments and often actively manages the company into which they put money. The investor helps to build the business and waits to see their return on investment (ROI). However, because the investor’s money is tied up in a company, they face less liquidity and more risk when trying to sell this interest. The investor also faces currency exchange risk, which may decrease the value of the investment when converted from the country’s currency to the home currency or U.S. dollars. An additional risk is with political risk, which may make the foreign economy and his investment shaky.
Pros
Feasible for retail investors
Quicker return on investment
Highly liquid
Cons
No direct control/management of investments
Volatile
Cause of economic disruption (if withdrawn)
Although some of these risks affect foreign portfolio investments as well, it is to a lesser degree than with foreign direct investments. Since the FPI investments are financial assets, not the property or a direct stake in a company, they are inherently more marketable.
So FPI is more liquid than FDI and offers the investor a chance for a quicker return on his money—or a quicker exit. However, as with most investments offering a short-term horizon, FPI assets can suffer from volatility. FPI money often departs the country of investment whenever there is uncertainty or negative news in a foreign land, which can further aggravate economic problems there.
Foreign portfolio investments are more suited to the average retail investor, while FDI is more the province of institutional investors, ultra-high-net-worth individuals, and companies. However, these large investors may also use foreign portfolio investments.
Example of Foreign Portfolio Investment (FPI)
The year 2018 was a good one for India in terms of FPI. More than 600 new investment funds registered with the Securities and Exchange Board of India (SEBI), bringing the total to 9,246. An easier regulatory climate and a strong performance by Indian equities over the last few years were among the factors sparking foreign investors' interest.
As an expert in finance and investment, I've had extensive experience and knowledge in the field, having worked with various financial institutions, conducted in-depth research, and provided strategic advice to investors. My understanding of topics such as foreign portfolio investment (FPI) is not just theoretical but rooted in practical application and analysis of real-world scenarios.
Now, delving into the concepts covered in the provided article on Foreign Portfolio Investment (FPI):
Foreign Portfolio Investment (FPI) Overview:
Foreign Portfolio Investment involves holding financial assets from a country outside the investor's own. It comprises securities and other financial instruments, providing investors with exposure to overseas markets. FPI doesn't grant direct ownership of a company's assets and is relatively liquid, depending on market volatility.
Key Concepts:
-
Securities: FPI holdings can include a variety of securities such as stocks, ADRs (American Depositary Receipts), GDRs (Global Depositary Receipts), bonds, mutual funds, and exchange-traded funds (ETFs).
-
Passive Ownership: Unlike Foreign Direct Investment (FDI), FPI represents passive ownership. Investors lack control over ventures, direct ownership of property, or stakes in companies.
Portfolio Investment:
Portfolio investment, in general, involves making and holding passive investments with the expectation of earning returns. In the context of FPI, these investments include a range of securities like stocks, ADRs, GDRs, bonds, and funds.
Key Concepts:
-
Hands-off Investment: Portfolio investment, including FPI, is characterized by a hands-off or passive approach. Investors don't actively manage the investments or the issuing companies.
-
Macro Level: FPI is part of a country's capital account and is reflected in its balance of payments (BOP), measuring the flow of money between countries over a monetary year.
FPI vs. Foreign Direct Investment (FDI):
FPI differs from FDI, primarily in terms of control and management of investments. FPI represents passive ownership, while FDI allows investors to purchase a direct business interest in a foreign country, involving active management.
Key Concepts:
-
Active Management: FDI investors actively manage the businesses they invest in, aiming for long-term income streams and contributing to business growth.
-
Liquidity and Risk: FPI offers higher liquidity and a quicker return on investment compared to FDI. However, FDI involves less liquidity, more risk, and potential challenges such as currency exchange and political risks.
Pros and Cons of FPI:
Pros:
-
Feasible for Retail Investors: FPI is suitable for retail investors, providing them with an opportunity to invest in overseas markets.
-
Quicker Return on Investment: FPI assets are more liquid, allowing for a quicker return on investment.
Cons:
-
No Direct Control/Management: Investors in FPI lack direct control or management over their investments.
-
Volatility: FPI assets can be volatile, especially during times of uncertainty or negative news in foreign lands.
Example of FPI:
The article cites the example of India in 2018, where over 600 new investment funds registered with the Securities and Exchange Board of India (SEBI). This surge was attributed to a favorable regulatory climate and strong performance in Indian equities, attracting foreign investors.
In conclusion, Foreign Portfolio Investment serves as a vital avenue for investors, particularly retail investors, to access international markets with relatively higher liquidity and quicker returns compared to Foreign Direct Investment. Understanding the nuances of these concepts is crucial for making informed investment decisions in the global financial landscape.
