What Is Foreign Portfolio Investment (FPI)?
Foreign Portfolio Investment (FPI) is investments by foreign investors in financial securities such as stocks, bonds, mutual funds, and other financial instruments in a nation's economic market. Foreign Portfolio Investment (FPI) does not involve the control or ownership of enterprises but is strictly for financial returns, unlike Foreign Direct Investment (FDI).
Types Of Foreign Portfolio Investment (FPI)
- Equity Investments: Purchase of shares or stocks in overseas firms.
- Debt Securities: Investment in foreign government securities or firm bonds.
- Mutual Funds & ETFs: Investment in foreign exchange-traded funds and mutual funds tracking stock or bond indices.
- Derivatives: Investment in futures, options, and swaps in overseas exchanges.
Benefits Of Foreign Portfolio Investment (FPI)
- Diversification: It minimises risk by diversifying investments across multiple nations.
- Higher Returns: Investors gain access to emerging markets with better potential returns.
- Liquidity: Smoother purchases and sales of securities than with direct investment.
- Economic Growth: Foreign capital infusions make financial markets stronger.
- Currency Stability: Improved demand for the local currency stabilises exchange rates.
- Market Development: Fosters innovation and competitiveness in financial industries.
Key Takeaways
Foreign Portfolio Investment (FPI) means foreign investment in shares, bonds, mutual funds, and other financial instruments but not with management control over the business. FPI diversifies investors' assets, provides them access to high-growth markets, and facilitates liquidity while host countries receive capital flows, market formation, and a stable currency. FPI differs from Foreign Direct Investment (FDI) in that it does not aim at financial returns alone but not the ownership or management control.
