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Foreign Portfolio Investment (FPI)



Definition

Foreign Portfolio Investment (FPI) refers to the investment by individuals, firms, or public bodies in foreign financial instruments like bonds, stocks, or other securities. It is an investment made without active management in a foreign country, often passive in nature. Unlike Foreign Direct Investment (FDI), FPI doesn’t give the investor control of the foreign assets.

Phonetic

“Foreign Portfolio Investment (FPI)” in phonetics is:Foreign – /ˈfɔː.rɪn/Portfolio – /pɔːrˈtfoʊ.lɪoʊ/Investment – /ɪnˈvɛst.mənt/FPI – /ˌɛfˈpiːˈaɪ/

Key Takeaways

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  1. Flexibility and Liquidity: Foreign Portfolio Investment (FPI) enables investors to participate in foreign markets without the need for direct ownership of assets. Due to this, it provides both flexibility and liquidity as assets can be readily bought or sold.
  2. Risk Diversification: FPI allows investors to diversify their investments across different geographic regions and asset classes. This can help to reduce risk as the impact of any negative development in one market might be balanced by positive performance in another.
  3. Dependent on Market Conditions: FPI is highly influenced by market conditions and investor sentiment. Unstable political or economic conditions can sway investor sentiment and affect the value of FPIs. This introduces an element of uncertainty and risk that investors need to manage.

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Importance

Foreign Portfolio Investment (FPI) is crucial as it presents a significant source of financial capital for a country’s economy. FPI, consisting of securities, shares, bonds, and other types of investment assets owned by foreign investors, helps stimulate economic growth, create jobs, and drive innovation. Additionally, FPI can enhance the liquidity level of a country’s equity and debt markets, foster a competitive environment, and reduce the cost of capital for businesses. However, high reliance on FPI can also expose the country’s economy to potential economic risks, mainly due to its typically short-term nature, making the term and its implications important for financial stability and strategic economic planning.

Explanation

Foreign Portfolio Investment (FPI) serves as a pathway for individuals, investors, or firms to engage in an economy’s financial system without any active role in the management or conducting the businesses themselves. The purpose behind FPI is to gain benefits from changes in exchange rates, interest rates, or differentials and capital appreciation, amongst other market factors. Through FPI, an investor gets the opportunity to diversify their investment portfolio across various countries and markets, significantly mitigating the risk brought by domestic market volatility. FPI not only promotes financial integration but also facilitates international capital mobility.FPI is often utilised as a strategy by investors who want to participate in a foreign country’s economic progression but avoid the complexities and risks of direct investment. For instance, by investing in foreign equities, bonds or other types of security, they can exploit the financial growth prospects of that specific country. Major benefits can be anticipated from investing in emerging markets where high growth rates are expected. Furthermore, FPI plays a pivotal role in developing the financial market of the host country by boosting its liquidity and fostering economic growth.

Examples

1. United States Investments in Japan: The United States has long been one of the major foreign investors in Japan. This includes portfolio investments in the form of ownership of Japanese equities and bonds. As of December 2018, it was reported that American investors held about $600 billion in Japanese securities, making it a significant example of Foreign Portfolio Investment (FPI).2. Norwegian Government Pension Fund Global: Known as the world’s largest sovereign wealth fund, the Norwegian Government Pension Fund Global makes substantial foreign portfolio investments around the world. As of the end of 2020, the fund held almost 1.4% of all global listed equities, highlighting its extensive FPI.3. QFIIs in China: China implements a system known as Qualified Foreign Institutional Investors (QFII). This program allows foreign investors to take part in P.R.C’s (People’s Republic of China) main-land exchanges in Shanghai and Shenzhen. It provides foreign investors with the opportunity to invest in Chinese equities and debentures, and as such, is an example of FPI. The QFII program substantially contributes to the flow of FPI into China which, as of end of 2019, was roughly $253 billion.

Frequently Asked Questions(FAQ)

What is Foreign Portfolio Investment (FPI)?

Foreign Portfolio Investment is an investment made by an individual or a firm in securities of another country, such as stocks or bonds.

How is FPI different from Foreign Direct Investment (FDI)?

The primary difference is that FDI involves a direct controlling interest in a foreign company, while FPI only gives the investor exposure to a foreign asset, without direct control.

What is the benefit of Foreign Portfolio Investment?

The main benefits include diversification of investments, potential for high returns, and the ability for countries to gain access to foreign capital.

What are the risks associated with FPI?

Risks can include changes in exchange rates, political instability, economic downturns in the foreign country, as well as regulatory changes that may impact investment returns.

Who can initiate a Foreign Portfolio Investment?

Institutional investors such as hedge funds, insurance companies, pension funds, as well as individual investors can initiate FPI.

How is FPI regulated?

FPI is regulated by international agreements as well as government regulations in both home and host countries. It’s crucial for investor to understand these regulations before investing.

Does FPI affect the host country’s economy?

Yes, FPI can have a considerable impact on the economy of the host country. It can lead to economic growth through direct funding to the businesses and can also influence currency value.

How does currency exchange rates affect FPI?

Exchange rates significantly affect FPI as the returns from these investments are converted back to the investor’s home currency. If the host country’s currency weakens against the home currency, it can negatively impact the investment returns.

Related Finance Terms

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