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 remains relatively liquid, depending on the market’s volatility. Alongside foreign direct investment (FDI), FPI is a common way to invest in an overseas economy and serves as an essential source of funding for most countries.
Key Takeaways
- Global Scope: FPI involves holding financial assets from a country outside the investor’s own, propagating a global investment portfolio.
- Diverse Holdings: FPI holdings can include stocks, ADRs, GDRs, bonds, mutual funds, and exchange-traded funds (ETFs).
- Passive Involvement: FPI consists of passive ownership where investors do not control or directly manage ventures or assets.
- Complementary Investment: Along with FDI, FPI is a primary means for retail investors to participate in an international economy.
Understanding Foreign Portfolio Investment (FPI)
Portfolio investment involves a hands-off, or passive, approach to investing in securities, expecting a return. In FPI, these securities can include stocks, ADRs, or GDRs of enterprises based outside the investor’s country. Holdings can also encompass bonds or debts issued by foreign companies or governments, as well as mutual funds or ETFs investing internationally.
Individual investors with interests outside their home countries usually engage in FPI. On a macroeconomic scale, foreign portfolio investment contributes to a country’s capital account and is reflected in its balance of payments (BOP) - which documents the money flow between countries within a monetary year.
FPI vs. Foreign Direct Investment (FDI)
With FPI, as with general portfolio investment, an investor remains passive, not managing the investment or the companies issuing such investments. There is no direct control over the assets or businesses.
In contrast, Foreign Direct Investment (FDI) enables an investor to acquire a direct business interest in a foreign land. For instance, an investor based in New York purchasing a warehouse in Berlin to lease to a German company for expansion represents an FDI. The investor here desires to generate a long-lasting income stream while aiding the company’s growth.
This active FDI investor manages their monetary investments, directly rejoicing in the business’s development while expecting returns. However, they encounter less liquidity and confront more risk should they wish to divest. These risks include currency fluctuations that might lessen investment value during conversion and political instabilities that may impact the foreign economy.
Pros and Cons of FPI
Pros:
- Feasible for retail investors
- Potentially quicker returns on investment
- Higher liquidity rate
Cons:
- Absence of direct control or management of investments
- Susceptible to volatility
- Can disrupt economies if withdrawn abruptly
FPI, being essentially confined to financial assets independent of property or direct company stake, remains more marketable. Hence, it’s more liquid than FDI, granting investors the luxury of quicker returns and exits. However, like most short-term investments, it is prone to volatility wherever market uncertainty looms. Quick withdrawals could aggravate the adverse economic situations in the investment host country.
Despite some shared risks with FDIs, FPI fits better within a retail investor framework, while FDI mostly suits institutional investors, ultra-high-net-worth individuals, and corporate entities.
Inspirational Example of Foreign Portfolio Investment (FPI)
In 2018, India saw significant growth in terms of FPI. Over 600 new investment funds registered with India’s Securities and Exchange Board (SEBI), scaling the investment total to 9,246 funds. A favorable regulatory environment and thriving Indian equities over recent years significantly attracted foreign investors’ interest, unveiling global opportunities.
Related Terms: Foreign Direct Investment, FDI, Global Investing, Capital Account, Balance of Payments.
