The full form of FPI is Foreign Portfolio Investment. It is the indirect method of making investments in a country outside one’s own.
FPI is a powerful method in investment economics. Foreign Portfolio Investment involves buying shares, stocks, mutual funds, and bonds in companies of some other country of the world.
Further, volatility, high liquidity, quick ROI, feasibility for retail investors, etc. are some common features of Foreign Portfolio Investment.
Moreover, foreign investments, direct or indirect, are instrumental in hyping the economy of a country by bringing revenue to it.
What is Foreign Portfolio Investment?
Foreign Portfolio Investment, commonly known as FPI, is a method of investing in the financial assets of an enterprise or company in a country by foreign people.
Conversely, FPI refers to the financial investments made in the assets of an enterprise or company in any country in the world, except the investor’s own country. In simple words, Foreign Portfolio Investment is an investment made in foreign financial assets.
For instance, if person Z (from country A) invests in company X of country B, it will be referred to as a foreign investment. Notably, such an investment is termed FPI as the financial investment made is indirect.
In simple words, FPI is an investment made by a person from a particular country into the financial assets of an enterprise in another country.
Further, such an investment is indirect or passive in nature. This means that the investor does not have any direct control over the stakes of the company he or she has bought. Neither the investor has any direct ownership of the property.
Foreign Portfolio Investment is the passive investment of securities. Generally, securities include stocks, bonds, debts, mutual funds, exchange-traded funds, etc. These investments are made to earn profits based on the ROI (Return on Investment).
Generally, average retailers are involved in foreign portfolio investments whereas foreign direct investment is a financial endeavor usually made by ultra-rich people.
However, these ultra-rich people who make FDIs in a country may also involve in FPIs in the same or some other countries simultaneously.
The Difference Between FPI and FDI
FDI is an acronym for Foreign Direct Investment. Foreign Direct Investment (FDI) involves foreign financial investment in the business interest of any country.
However, in FPI, the financial investment made by a foreign investor involves stocks, bonds, securities, exchange-traded funds, mutual funds, global depository receipts (GDRs), etc. It is an indirect method of investment into the pre-existing enterprises of a country.
Both FPI and FDI are important for the growth of the economy of a country as it brings revenue to the country. Moreover, it is facilitated more by the floating notion of globalization that promotes global trade.
Although Foreign Direct Investment is preferred more, much of the foreign financial investment is made through FPI (Foreign Portfolio Investment).
Merits and Demerits of FPI
Though Foreign Portfolio Investment is an indirect method of making a financial investment in a foreign country, it is preferred because of its liquid nature, and quick ROI. Here are some of the common merits and demerits of FPI.
Merits of FPI
1. Greater Market Access
Foreign Portfolio Investment provides greater market access to investors all over the world. Evidently, it is the greatest benefit of FPI. Investors have the ability to make investments in various other countries than their own and make profits.
2. Quicker Return on Investment (ROI)
Foreign Portfolio Investment facilitates a quick way of earning returns on the investments made. This is either from the profits earned on making the investment in the stakes of the company or reselling those stakes.
3. High liquidity
FPI does not involve direct investment. This makes it easier to exit the company or country the investment is made in while earning from it. This is not feasible with Foreign Direct Investment (FDI).
Demerits of FPI
1. No Direct control
Since FPI is a passive investment, an investor does not have the right or authority to manage the investments or the company that issues investments directly.
2. Volatility
Similar to most short-time horizon investments, Foreign Portfolio Investments are highly volatile in nature.
3. May lead to economic disruption when withdrawn
The liquidity of FPI allows the withdrawal of the investment. Generally, several investors withdraw their investments if they find or guess that the country they have invested in may be suffering from an economic setback.
When true, this worsens the case when foreign portfolio investments are withdrawn.
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