Finance

Foreign Portfolio Investment (FPI): A 101 guide

Foreign Portfolio Investment

Are you interested to widen your investment portfolio by owning financial assets in other countries? If so, then you should consider Foreign Portfolio Investment (FPI). Just like Foreign Direct Investment (FDI), it lets investors put their money overseas. Let’s learn more about this investment strategy in this post.

Foreign Portfolio Investment (FPI): Introduction and benefits

When an investor holds financial assets and securities in a foreign country, it is termed as a Foreign Portfolio Investment. However, the investor does not hold direct ownership of foreign assets and securities. Furthermore, the assets are reliant on the market’s volatility.  Let’s understand this in detail.

What is Foreign Portfolio Investment?

FPI is for those investors who wish to invest outside their country. It allows investors to passively invest in assets and securities of overseas land with an endeavor to earn returns. The overseas security eligible for investment include american depositary (ADRs), stocks and global depositary receipts of companies that have headquarters in an overseas land. The investors can also hold debt or bonds issued by foreign companies, etf and mutual funds in overseas assets. FPI is a crucial component of the country’s capital account. It is depicted in the country’s balance of payments (BOP), which measures all money flowing between countries over a year.  

Key facts related to Foreign Portfolio Investment

If you are keen to invest in FPI, then here are a few points you should know about it:

  • FPI is an instrument through which investors can participate in the economy of a foreign land. It is most suitable for retail investors.
  • FPI investments include bonds, stocks, mutual funds, etf, ADRs and GDRs.
  • There is passive ownership in the case of FPI. This means that investors don’t have control over the stake and ventures.
  • FPI investments are subject to market volatility.

Foreign Portfolio Investment v/s Foreign Direct Investment

Both FPI and FDI are often confused with each other as both are investment strategy to put money in funds in a country other than the home country of the investor. However, both these investment strategies are quite different from each other. FDI is a form of direct investment while FPI is a kind of passive investment.

Foreign Direct Investment

In the case of FDI, an investor can control his investments and actively manage the overseas companies in which he holds the assets. Hence, the investor also helps the foreign companies to build their business and then eagerly awaits ROI. It is suitable for individuals with high net-worth and companies.

For instance: an investor is based in London. He then purchases an outlet in the lease in Italy for an Italian company that needs to expand its operations. So this is a kind of FDI. The investor aims to gain long-term benefits, while also helping the company issuing asset to grow its profits.

The money of an FDI investor is tied to a company. Hence, the assets are subjected to less liquidity. But, the FDI investors are more prone to risk when they try to sell the interest. In addition to these, the investor is also subjected to risk related to the exchange rate. So, the value of the investment may decrease when a currency is converted to US dollars or home currency. Furthermore, an FDI investment is also prone to political risk.

Pros

  • The investor can directly control his investments
  • It is less volatile
  • It includes investment in the form of property in a foreign land

Cons

  • FDI investments are more susceptible to risk
  • An investor faces the risk of exchange rate
  • It is also subjected to political risk

Foreign Portfolio Investment

In contrary to an FDI investor, an FPI investor does not have direct control over the foreign assets. It signifies that the investor cannot actively manage the assets and securities, or the overseas companies issuing investment.

An FPI investor is also prone to certain risks but the investor faces a lesser degree of risk than an FDI investor. FPI does not include a stake in a company or foreign property but includes financial assets like bonds, etf, etc. So, they are more marketable.

For instance, an investor living in the US buys shares of a company based in Germany then that is treated as foreign portfolio investment. The investor does not hold direct ownership in the company but receives ROI quickly.  

FPI allows investors to gain a quicker return on investment. However, an investor is subjected to more liquidity and volatility. FPI can increase economic problems in a country as the money is departed from the country of investment if there is negative news. The investment strategy is more suitable for retail investors.

Pros

  • It is suitable for the investors interested in retail
  • It is highly liquid
  • FPI yields ROI quickly

Cons

  • The investor does not have direct control on investments
  • It is highly volatile
  • It causes economic disruption in case it is withdrawn

Advantages of Foreign Portfolio Investment

There are many advantages of Foreign Portfolio Investment (FPI). Let’s have a look at them:

Portfolio Diversification

If an investor intends to diversify his portfolio internationally, then FPI is the best option. It helps the investor to achieve high returns after adjustment of risks. Hence, an investor having FPI investment in different counties will experience less volatility. For example, A Canadian investor holds assets in Taiwan, Japan and China. So, the factors that affect the stock exchange market of these countries will be different. So, at no time, the investor will be at total loss.

Exchange Rate

The exchange rate of currencies keeps on fluctuating. On a day, the currency exchange rate of a country can be higher than in other countries while it can be lowest on other days. An FPI investor can capitalize on strong currencies to make a profit on high periods. For example: If the currency of Germany is strongest on a given day, the investor holding assets in the country can take benefit from the situation. 

Liquidity

FPI are highly liquid in nature. Hence, they can be traded very easily and frequently. FPI investors enjoy high buying power and streams of cash. Furthermore, these investors are in a good position to quickly capitalize on opportunities for purchase.

Bigger Market

An FPI investor has access to a wide market. Hence, if the investor’s home country becomes too competitive due to an increase in the number of businesses offering the same services, then the investor can shift his focus in another country where the competition is less and there are more chances of sales.  

International Credit

An FPI investor enjoys a broader credit base. Investors can access credit of all the countries where they hold investments. Furthermore, investors can quickly receive international credit at their favorable terms. This facilitates them to find out whether or not they can execute a new project. This also allows investors to avail credit facilities from overseas if the credit sources in their home country are either unavailable or expensive.

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