Understanding Foreign Portfolio Investments (FPI)



Investments in basically allocating money for something in expectation of returns on the invested money. Investors usually borrow money from the market at some interest rate and invest in stocks, shares or bonds of various companies to get a higher return on their invested money. The company’s growth is directly proportional to the investments. Higher the number of investments, higher is the growth of a company.

Foreign investment is an investment when an investor invests in shares or assets of a company residing in a foreign country. Today, big companies usually invest in reputed foreign companies due to increased globalisation and for higher profits. There are four major types of foreign investments, commercial loans official flows, foreign direct investment (FDI), foreign portfolio investment (FPI).

Foreign Portfolio Investment is an investment in which the investor invests in the financial assets and securities in a foreign country. Depending upon the volatility of the market it is relatively liquid. The investor does not get the direct ownership of company’s assets. Stocks, ADRs, GDRs, bonds, mutual funs are included in FPI.

Investor usually prefer investing in FPI than in FDI. It is considered as a country’s capital account part and it is displayed on the balance of payments. The amount of flow of money between two countries is measured by the BOP. In FPI, an investor is not directly included in managing the investments or the companies that issue the investments. The risks associated with the foreign portfolio investment is lesser as compared to the foreign direct investment. As liquidity of FPI is more than FDI, investor quickly gets returns on his investments. As FPI investments do not include property or direct stake in companies, they can be more marketable. Because of the short-term horizon offered by most of the investments, volatility is a big threat for FPI assets. Due to some uncertainty or negative news in the foreign country, FPI money is usually departed from the country of investment. This leads to further economic problems. An average retail investor benefits out of foreign portfolio investments.

Some of the benefits of foreign portfolio investments are

  1. Portfolio diversification – a simple way is provided by the FPI to the investors to diversify their portfolios internationally
  2. International credit – a larger international credit is provided by the FPI to the investors as they have an access to the credits in the foreign country of investment.
  3. Benefits from exchange rates – by making an investment in a foreign country whose currency is stronger than the native country can benefit they investor.
  4. Access to larger market – usually, foreign countries have a larger market and less competition as compared to the home country. By using the FPI, investors take advantage of these conditions in a foreign country.

In FPI, the transactions are liquid. It means that buying and selling is a fast process. Usually portfolio investments are the investments which contain equity investments with owner holding less than 10% of company’s share. Portfolio flows is the term used for the transactions involved in the portfolio investments. The rates of return are usually high on foreign portfolio investments with minimal risk. Different channels through which returns in the foreign portfolio investments are obtained are interest payments, non-voting dividends, increased market value of security and stronger foreign currency.

Making Investments in a Foreign economy, taking over a foreign company or in any case extending your business abroad can benefit financially and may furnish you with the boost expected to hop to another degree of achievements. on the contrary, foreign investments are risky and it is profoundly significant to assess the financial atmosphere and the risks associated with it completely before doing it. Likewise, it is fundamental to take help of a financial expert who has an experience in working globally, as he can provide a clear understanding of the predominant financial scene in the target nation. He can even assist with observing business stability and anticipate future development. Thus, before making any investment all the pros and cons should be studied thoroughly and investments should be made with a smart strategy. Smart investors who invest their money with a smart strategy never lose their money even during the difficult times. They incur less losses as compared to the investors who blindly make their investments.