An FPI or Foreign Portfolio Investment is a way to buy foreign financial assets like stocks, mutual funds, or ETFs through overseas investments. The investors who invests in these portfolios are commonly known as Foreign Portfolio Investors. This makes the investors diversify their portfolio through various profits and losses made internationally.
Meaning & Examples
Foreign Portfolio Investment usually include stocks, mutual funds, debt funds, ADRs (American Depositary Receipts) issued by foreign companies where investments are done by foreign portfolio investors. The investors must be from investing on other countries from their home countries.
In case of macro level economy, FPI or Foreign Portfolio Investments can is one of the part of the country’s BOP (balance of payment) calculation in one financial year.
Other examples of foreign portfolio investments are bonds, stocks, mutual funds, and global depository receipts or GDRs.
Risk and Benefits
The following are the risks and benefits associated with foreign portfolio investments:-
- The primary risk that foreign portfolio investments include is high volatility of market. International transactions often include high volatility according to the status quo of the financial sector of a country.
- The laws & policies of a country drastically effects the economic condition of a country. So, it often changes the investment criteria of a country.
- Due to high price volatility, the economic growth of a country may thwarted leading to a higher price volatility with lower liquidity option.
- The most important benefit of investing and foreign portfolio investment is diversified portfolio. As people who invest deals with vast economic assets of a country resulting in higher profits. An investor will like to benefit from country X, if he incurs major losses from country Z.
- An investor will directly contact with big markets and greater risks. This will help them to make more diversified investments with higher returns.
- Investors will be able to increase their credits from international market and it reflects on their credit base. While, having domestic credit score, international credit score can help leverage the returns on equity investments.
- Dealing with the dynamic nature of international market, where the market usually revolves around massive growth or losses, you can build your risk-appetite towards more consolidated portfolio.
FPI vs FDI
Foreign Direct Investment, a firm or individual in one country into business interests usually makes FDI from another country. FPI, on the other hand, is an investment made in securities, or other financial assets issued in another country.
Also, FDI is typically made to establish a long-term business interest in a foreign country, whereas, FPI is typically made to generate short-term returns from the stock markets.
In addition, FDI is subject to more regulations than FPI, while FPI is more volatile than FDI.
FDI is generally considered to be a more beneficial form of investment for the host country than FPI. However, FPI can help to improve the liquidity of a country’s stock market and can provide a source of foreign exchange.
The eligibility criteria associated with foreign portfolio investments in India are-
- Investor is a resident of India.
- Have permission to invest in foreign companies outside the home country.
- Should be a resident of a country signatory to bilateral MOU (memorandum of understanding) with SEBI.
- Should be professionally competent to invest directly on foreign capital market or, should have sound investment portfolio.
- Not a resident from a country identified in the public statement of Financial Action Task Force (FATF), that means should not belong to a jurisdiction where there is anti-money laundering deficiency is to which countermeasures may apply.
- If the person is a corporate or trust, then should have necessary proof as in eligible MOA or AoA entitled to that.
What is the role of FPI in India?
There are various roles of FPI in India. It helps to improve the liquidity in stock market, provides source of foreign exchange, and can help boost economic growth.
The inflows of FPI help to increase the demand for shares in Indian stock market, which lead to higher stocks prices and increases the liquidity. This makes it is here for companies to raise capital.
It provides a source of foreign exchange in India, which can help stabilize the Indian rupee and can make it, be here for India to import goods and services. This can help boost the economic growth. Because they can provide companies with more capital to invest in new projects and expansion. Also, if we are includes can help to attract foreign talent and expertise to India.
However, FPI in close can be also volatile because they can be sensitive to the changes of global economic market conditions for example if there is a global recession FPI inflows in India may also decline.
Overall, FPI has a positive role to play an Indian economy. However, it is subject to risks associated with FPI inflows, which the investors should be aware about after assessing the market condition.