Foreign Portfolio Investment (FPI)
Contents
Demystifying Foreign Portfolio Investment (FPI): A Comprehensive Guide
Foreign portfolio investment (FPI) serves as a gateway for investors to diversify their portfolios and tap into opportunities beyond their home countries. In this comprehensive guide, we'll unravel the complexities of FPI, exploring its nuances, differences from foreign direct investment (FDI), and the pros and cons associated with this investment strategy.
Understanding Foreign Portfolio Investment (FPI)
FPI entails the acquisition of securities and financial assets in a foreign country, providing investors with exposure to international markets. From stocks and bonds to mutual funds and ETFs, FPI encompasses a wide array of investment vehicles. Unlike FDI, which involves direct ownership and control over foreign assets, FPI offers a more hands-off approach, allowing investors to capitalize on global opportunities without active management.
Differentiating FPI from FDI
While both FPI and FDI enable investors to participate in overseas economies, they differ significantly in terms of control and risk. FDI entails direct ownership and management of assets in a foreign country, often with a long-term investment horizon. In contrast, FPI offers liquidity and flexibility, allowing investors to swiftly enter and exit international markets. However, FPI comes with its own set of risks, including volatility and susceptibility to economic disruptions.
Pros and Cons of Foreign Portfolio Investment
FPI presents numerous advantages, such as accessibility for retail investors, quicker returns on investment, and high liquidity. However, it also poses challenges, including lack of control over investments, volatility, and the potential for economic disruptions upon withdrawal. Despite these drawbacks, FPI remains an attractive option for investors seeking diversification and exposure to global markets.
Example of Foreign Portfolio Investment (FPI)
In 2018, India witnessed a surge in FPI activity, with over 600 new investment funds registering with the Securities and Exchange Board of India (SEBI). This influx of foreign capital was driven by factors such as regulatory reforms and robust performance in Indian equities, underscoring the appeal of FPI in emerging markets.