Foreign Portfolio Investment

Investment is quite necessary for any economy to grow, and that investment can either be domestic or foreign investment. Foreign investment provides a boost to the economy as it brings in foreign currency and also results in the strengthening of the local currency. Foreign investment can be referred to as an investment done by an individual, organization, or by nation in another country. Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI) are the two most common ways via which foreign investment is being made. Also, the increase in FPI and FDI can have positive effects on the growth of the economy. 

As per the report published in the Union Budget of India, in the financial year, 2021-22 Sensex observed a hike of 11.36% due to an increase in Foreign Portfolio Investment (FPI) in India.

What is Foreign Portfolio Investment (FPI)?

Foreign Portfolio Investment (FPI) can be referred to as an investment made by an individual, company, or nation in another country in the form of security, financial asset, or a bond listed on the stock exchange of that nation. However such investments don’t provide an investor with ownership in a company’s asset but allow them to earn from the volatility of the market. FPIs are often considered short-term investments, as it’s easy to buy and sell portfolio investments within short periods, which allows you to make huge profits in the short term. A portfolio investment is widely traded thus providing it with higher liquidity when compared to direct investment and thus making it simpler to buy and sell securities. An FPI can include a bond/stock, Global Depository Receipts (GDR), mutual funds, American depository receipts (ADRs), or Exchange-traded funds (ETF). The FPI is a crucial part of a nation’s capital that reflects on the BOP of the nation (Balance of Payment), also it’s one of the easiest for investors to trade in securities and stocks of other countries. Unlike Foreign Direct Investment (FDI), the FPI allows you to trade shares of any company listed on the stock exchange instead of influencing that particular company to make an investment. 

Difference between FPI and FDI:

Foreign Portfolio Investment (FPI)	Foreign Direct Investment (FDI)
It’s a direct investment and involves active investors	It’s an indirect investment and involves passive investor
This kind of investment is made in countries with the potential to grow and has a skilled workforce.	This kind of investment is made in foreign markets in pursuit high of returns.
It’s considered a long-term investment.	It’s considered a short-term investment.
It provides ownership of the company’s assets and decision-making power in the management.	It doesn’t provide any kind of ownership in the company’s asset and also doesn’t provides any role in the management.
Investment is being made in the physical assets and the stake of the foreign company.	Investment is being made in bonds, securities, or funds of the foreign company.
This kind of investment is stable and has lesser chances of loss.	This kind of investment is quite volatile and has higher chances of losses.

Advantages and Disadvantages of Foreign Portfolio Investment (FPI):

Just similar to every investment, the FPI also has its advantages and disadvantages, which are discussed below.

Advantages of FPI:

• Foreign Portfolio Investment (FPI), allows an individual investor to trade in bonds and securities of their own country as well as in other countries.
• It allows retail investors, to invest their money in foreign companies for a short period of time and earn profit from the volatility of the market.
• The difference in the currency exchange rate can help a nation’s economy as well, for example, if an investor has invested in a company based in a nation with a more valuable currency than its own nation, then the investor as well as that nation will also get benefited. 
• Unlike FDI, Foreign Portfolio Investment (FPI) allows investors to invest even a small amount and trade securities/bonds of foreign companies.
• FPI allows everyone to invest overseas, for example, a retail investor, an organization, or even a government. 

Disadvantages of FPI:

• The FPI is mainly driven by the volatility of the market and has a high chance of losses, and is not considered a stable investment.
• An economic disruption or declining GDP of a nation, in which the FPI investment has been made can result in huge losses.
• Just opposite to FDI, Foreign Portfolio Investment (FPI) doesn’t provide ownership in the company’s asset in which the investment has been made.

Impact of FPI on the Indian Economy:

Foreign Portfolio Investment (FPI) is quite important for the positive economic growth of India. India has now become the sixth-largest economy in the world and this is because the number of foreign portfolio investors has multiplied several times. In November 2020, India observed a Foreign Portfolio Investment (FPI) of Rs. 8381 crores, thus allowing the Indian economy to recover faster and grow. Just similar to FDI, Foreign Portfolio Investment (FPI) also helps a lot to promote economic growth in a nation and especially in developing countries like India. An FPI diversifies the sources of external finance, assists in the development of local markets, and helps in the reduction of capital costs as well.