You may have often heard about the acronym FPI in stock market news or while reading business newspapers. So, what is foreign portfolio investment exactly? It is a method of investment that allows the investor to hold significant assets in a foreign country. In most cases, an FPI comprises several types of assets including bonds, stocks, and ‘cash equivalents’. Cash equivalents may include Government-issued Treasury and Savings Bonds, T-Bills, Marketable Securities, and ‘Money Market Funds’.
Together with FDI or Foreign Direct Investment, FPIs present one of the easiest ways to invest in a foreign country. Unlike FDI, the investor does not have direct access to, or control over, the assets of the company in which they have invested. FPIs are thus categorised as indirect and hands-off investment techniques meant solely for greater returns.
Outside the boundaries of theoretical concepts, both FPIs and FDIs are essential for a country’s economy. India, currently the world’s 6th largest economy in terms of nominal GDP in 2020, is ideally suited for more portfolio investors as it has witnessed steady growth ever since liberalisation in 1990.
Besides, Indian stock markets have recovered better than equivalent institutions in other countries. There are fewer chances of market volatility as jobs pick up, and the economy opens up. These factors, plus a stable Government at the Centre, ensure that market volatility is pretty low and hence foreign portfolio investment in India remains an area to explore for many novice investors.
Unlike Foreign Direct Investments, portfolio investors do not wish to gain control of a company. Their primary aim is speculative profit. Around the world, the biggest and growing economies receive the largest chunks of investments via the FPI route because of a couple of reasons –
That means foreign investors can now buy securities in such high-value government-backed entities like the Real Estate Investment Trusts (REITs) besides Infrastructure Investment Trusts (or InvITs).
There are several other aspects of Financial Portfolio Investment. A steady inflow of such investments indicates a robust stock market. Global analysts follow these developments with care as they signify the current economic status of a country.
Finally, FPIs offer investors the freedom to diversify their portfolios internationally. A portfolio investor can also take advantage of exchange rate differences. Thus, an investor from an economically challenged country can invest heavily in a foreign country that has a much stronger currency, thereby making sizeable profits.
There are several substantial differences between these two channels of foreign investments. The major ones are as follows –
FPIs have several benefits and downsides. The most common ones include the following –
|FPI advantages||FPI disadvantages|
|Helps companies raise significant capital without incurring massive expenses.||Economic turmoil and political instability may have a negative impact on any investment via the FPI route.|
|Investors can gain substantially from exchange rate differences.||Markets in any country are inherently volatile. Despite the fluid nature of FPIs, losses may pile up if funds are not withdrawn hastily.|
|FPIs help investors diversify their portfolios, which, in turn, boosts their confidence.|
|FPIs inevitably move towards larger markets with lower competition. This combination is rather attractive to any investor.|
India will receive a significant portion of funds via FPIs. It is believed that all investments will be sector-agnostic. The RBI’s and the Finance Ministry’s recent steps will also help India become an investment hotspot in an otherwise lackadaisical scenario.
Following are the primary three categories of FPI in India-
Category I (or low risk) – This contains financial assets backed by the Indian government. Examples are government bonds, any fund owned by the Indian state, a sovereign wealth fund, etc.
Category II (or moderate risk) – This includes bank deposits, mutual funds, insurance policies, pension funds, etc.
Category III (or high risk) – This comprises all such foreign portfolio investments that are not covered under the first two categories. Like, charitable trusts or endowments.
Ques. Who Can Make FPI?
Ans. Foreign portfolio investing has become popular and a lot of investors are becoming a part of it. Foreign portfolio investments are usually made by:
Ques. Why is foreign portfolio investment important?
Ans. Foreign portfolio investment holds great importance as it gives investors an opportunity to explore international diversification of their portfolio assets, which in turn can help achieve a higher risk-adjusted return. Moreover, this also means that when an investor has stocks invested in different countries will experience less volatility over the entire portfolio.
Ques. What are the two types of FDI?
Ans. FDI can be categorized into two types- Horizontal and Vertical. However, there are two other types of foreign direct investments that have emerged, viz. conglomerate and platform FDI.
Ques. Which country sees the highest foreign direct investment?
Ans. The United States is the largest recipient of FDI by far, with inflows of $251 billion, followed by China having flows of $140 billion and Singapore with $110 billion.