Introduction to Foreign portfolio investment (FPI)
Foreign portfolio investment (FPI) comprises securities and other financial assets held by investors in a different country. It does not present the investor with direct ownership of a company's assets and is relatively liquid based on the volatility of the market. Along with foreign direct investment, FPI is a common way to invest in an overseas economy. FDI and FPI are both known to be important sources of funding for most economies.
Understanding Foreign Portfolio Investment (FPI)
Portfolio investment involves the making and holding a hands-off—or passive—investment of securities, performed with the expectation of earning a return. In foreign portfolio investment (FPI), these securities can involve stocks, American depositary receipts (ADRs), or global depositary receipts of businesses headquartered outside the investor's nation.
Holding also encompasses bonds or other debt issued by these companies or foreign governments, mutual funds, or exchange-traded funds (ETFs) that invest in assets abroad or overseas.
Benefits Of FPI
- Portfolio diversification- Foreign portfolio investment presents investors with an easy opportunity to expand their portfolio globally. An investor diversifies their investment portfolio to obtain a higher risk-adjusted return, which is ultimately done to help generate alpha.
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- Increases the liquidity of domestic capital markets-As markets become more liquid, they become more profound and broader, and a more comprehensive range of investments can be financed. Savers can invest with the confidence that they will promptly manage their portfolio or sell their financial securities promptly if they need access to their savings.
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- Promotes the development of equity markets-Increased competition for financing leads to rewarding superior performance, prospects, and corporate governance. As the market's liquidity and functionality evolve, equity prices will become value-relevant for investors, ultimately driving market efficiency.
Policies For Foreign Portfolio Investment
Foreign portfolio investment is intrinsically unstable, and rigorously regulated financial markets are required to manage the risk effectively. Furthermore, the financial system must be able to identify and mitigate risks for prudent and effective allocation of foreign or domestic capital flows.
Economic growth and development are facilitated by successful financial intermediation and the effective allocation of credit. Financial systems can control their health through the identification and management of business risks. Furthermore, the financial system must also withstand economic shocks.
