Investment in the stock market is popular across the globe. Whether you’re keen on the share market or not, you must have come across the term “foreign portfolio investment.” It is a situation in which investors outside the country hold securities and other financial assets. However, the investor does not have direct control over the company’s assets and is relatively liquid depending on market volatility. There are a variety of assets in foreign portfolio investment, including bonds, stocks, and cash equivalents such as bonds, marketable securities, T-bills, and others. Continue reading to find more information about foreign portfolio investment (FPI).
What is Foreign Portfolio Investment (FPI)?
Foreign portfolio investments, including stocks, American depository receipts, global depository receipts, and others, are held by investors living beyond the geographical boundaries of the nation. In addition to the above assets, an individual can also invest in bonds, mutual funds, or debt issued by companies or foreign governments.
The primary goal of investing in FPI is to maximize wealth from their investments. The largest and continuously growing economies around the world receive the largest number of investments through FPI. It is quite likely that an individual investor will use an FPI to invest in opportunities accessible outside of their native country. On a bigger scale, a country’s capital account, which includes its foreign portfolio investment, is represented in its balance of payments (BOP). The BOP determines how much money travels from one country to another in a particular fiscal year.
Foreign Portfolio Investment Example
Portfolio investment generally refers to purchasing securities on the stock market. For instance, a US investor might purchase shares of a company on the Indian stock exchange. Therefore, it will be considered a foreign portfolio investment. According to the reports, investors are gaining confidence in the Indian stock market after the fast recovery from the global pandemic.
Key Features Foreign Portfolio Investment
Listed below are some of the benefits of investing in foreign portfolio investments.
- Investment in foreign portfolios will allow the investor to broaden their portfolios internationally and create the maximum return from them.
- Due to its ability to source finance in other countries, FPI can supply creditors with a sizable revenue base.
- When an investor owns a foreign portfolio investment (FPI) in a nation with a stronger currency than their own, the difference in exchange rates between the two nations may be advantageous to the investor.
- The foreign portfolio investment option is suitable for retail investors because it requires less capital than FDI and generally entails less complex legal requirements.
- Foreign portfolio investments yield returns more quickly than FDI. In essence, the investor has the freedom to sell the investments in his or her portfolio whenever they like, for the price at which that asset is currently trading.
Categories of Foreign Portfolio Investment (FPI) in India
Foreign portfolio investment in India has been classified into three primary categories that are listed below.
- Low-risk portfolio: This consists of financial resources supported by the Indian government such as government bonds, any fund held by the Indian government, a sovereign wealth fund, and others.
- Moderate-risk portfolio: An individual can invest in bank deposits, mutual funds, insurance coverage, pension funds, and other assets.
- High-risk portfolio: This includes all comparable international portfolio investments that fall outside of the first two categories. For instance, charity or endowments.
Conclusion
Foreign portfolio investments are a great source of wealth creation. An investor can buy assets from other economically growing countries and get the maximum return on their investments. Individuals, companies, and foreign governments can make investments in foreign portfolios. There are various categories among which you can choose the one that is most appropriate for you.