Foreign Portfolio Investment (FPI)

An investor who purchases foreign financial assets is known as a foreign portfolio investment (FPI). Fixed deposits, equities, and mutual funds are among the financial assets involved. Investors hold portfolio investments directly or have them handled by financial experts. It does not provide the investor actual ownership of a company’s assets and, depending on market volatility, is very liquid. Foreign securities are often traded on a regulated securities exchange or in an over-the-counter market.

Foreign portfolios enhance volatility, which leads to a rise in risk. FPI is one of the most popular ways to participate in an overseas economy, alongside foreign direct investment (FDI). For most economies, FDI and FPI are both major sources of finance. As a way of portfolio diversification, foreign portfolio investment is becoming increasingly popular. FPIs are often made up of securities and other alternative foreign financial assets owned passively by a foreign investor.

Foreign portfolio investment, in economics, is the introduction of capital into a nation where foreigners deposit money in a country’s bank or make purchases in the country’s stock and bond markets, often for speculative purposes. The goal of investing in overseas markets is to diversify one’s portfolio while still generating a good return. Due to the risk, they are ready to take, investors expect great returns. FPI, along with foreign direct investment (FDI), is one of the most popular ways for investors, particularly retail investors, to participate in an overseas economy.

Example of Foreign Portfolio Investment

Foreign portfolio investors are often subject to more share price volatility, which increases their risk, and investors want to be compensated for taking on this risk. The majority of foreign portfolio investments are made up of securities and other foreign financial assets that the foreign investor holds passively. Unlike FDI, FPI is a form of passive ownership in which investors have no direct control over enterprises, property, or a share in a firm.

Experts pay close attention to FPI since it is a leading indicator of stock market performance. FPI also improves stock market efficiency by ensuring that the value and price of a stock are in balance. Equities, bonds, derivatives, mutual funds, and guaranteed investment certificates, among other securities, are available to foreign portfolio investors. The term “portfolio investment” refers to the process of creating and keeping a hands-off or passive investment of assets with the goal of earning a profit.

FPI allows investors to diversify their investment portfolios. In other nations, investors can gain access to larger sums of financing. They can expand their credit portfolio. Investors can protect their line of credit by extending their credit base. Having an international credit score might be advantageous if your local credit score is poor. This permits the investor to take on greater risk and earn higher returns on his or her stock investment.

Stocks, American depositary receipts (ADRs), and global depositary receipts of firms based outside the investor’s country are examples of securities that can be included in foreign portfolio investment. Investing in foreign portfolios is popular with a variety of investors. Common transactors of foreign portfolio investment include:

  • Individuals
  • Companies
  • Foreign governments

Individuals, corporations, and even governments in international countries can invest in foreign portfolios. This form of investment allows individuals to diversify their portfolios while gaining a competitive advantage on the worldwide market. Foreign markets are sometimes less competitive than local markets. As a result, FPI exposes you to a larger market. Foreign markets are less saturated than domestic markets, thus they may provide better returns and more variety.

If investors want to make more money, they must be ready to take on more risk. Emerging markets might provide a different risk-reward profile to investors. Individual investors who want to participate in possibilities outside of their own nation are more likely to use an FPI. Markets get deeper and broader as they become more liquid, allowing for a greater choice of ventures to be funded. Savers may invest with confidence, knowing that if they need to access their money, they will be able to manage their portfolio or sell their financial instruments promptly.

A portfolio investment is one made by a person who is not involved in the company’s management. This is in contrast to direct investment, which allows an investor to have some management influence over a business. The volatile character of foreign currencies can be used by an investor. Some currencies can increase or fall dramatically, and a strong currency can be leveraged to an investor’s advantage. As the market for finance becomes more competitive, excellent performance, prospects, and corporate governance will be rewarded.

Equity prices will become more value-relevant for investors as the market’s liquidity and functioning improve, eventually driving market efficiency. On a larger scale, foreign portfolio investment is a component of a country’s capital account and is reflected in its balance of payments (BOP). Over the course of a monetary year, the BOP tracks the amount of money flowing from one nation to another. Portfolio investments are equity investments in which the owner owns less than 10% of the company’s stock. These transactions are referred to as “portfolio flows” and are reported in a country’s balance of payments financial account.

Those interested in diversifying their portfolios by investing in shares, bonds, mutual funds, or other assets/securities in a foreign nation make foreign portfolio investments. Furthermore, many countries are afflicted by financial crime, such as money laundering. Investing in nations where money laundering is common raises the investor’s jurisdictional risk. FPI is crucial because it influences stock markets and increases capital market liquidity in the host nation.

Information Sources:

  1. angelone.in
  2. corporatefinanceinstitute.com
  3. investopedia.com
  4. wikipedia