Foreign Portfolio Investment: Meaning, Benefits & Types

You may have often come across the acronym FPI in the business papers or in the stock market news. So, what is FPI exactly? Foreign portfolio investment or FPI is a form of investment wherein investors hold assets and securities outside their country. These investments could include stocks, bonds, exchange-traded funds (ETFs), or mutual funds. It is one way in which an investor can partake in a foreign economy.

The reason FPI is watched carefully by experts is that it is an indicator of the stock market’s performance. FPI also enhances stock market efficiency and ensures that there is a balance between the value and the price of a stock.

Emerging economies that show a potential for growth that is higher than the investor’s country tend to see a high level of participation by foreign investors. Another factor that influences FPIs is an attractive growth rate.

If you want to invest in an FPI abroad, you would need to look at the host country’s economy and growth path.

Who regulates FPI in India?

In India, foreign portfolio investment is regulated by the Securities and Exchange Board of India (SEBI). FPI in India refers to investment groups or FIIs (foreign institutional investors) and QFIs (qualified foreign investors).

So, what is the difference between FPI and FDI?

Now that you know what is FPI, you should also be aware of the difference between FPI and another foreign investment term, FDI.

  • FDI refers to a scenario when a direct business interest is established overseas. This business interest could be a warehouse or manufacturing entity for example.
  • An FDI could lead to a transfer of resources, knowledge, and funds and involves a joint venture or setting up of a subsidiary.
  • Foreign direct investment is more long-term than foreign portfolio investment and is also bulkier.
  • Foreign direct investments are taken up by institutions or venture capital companies. Foreign portfolio investment is merely investing in the securities or assets of another country.
  • Talking about the stock market, FPI involves buying shares or bonds that are made available on the foreign country’s exchange. FPI is liquid and can be bought and sold easily.
  • While FPI involves investors who are passive, FDI is all about active investors. FPI is not a direct investment and is a short-term form of investment when compared to FDI.

Categories of FPI (for investments in India)

Earlier, FPI was divided into three categories, on the basis of their risk profile.

  • Category I or low-risk: This kind of FPI includes government/government-related establishments like central banks and international agencies among others. An example could be a sovereign wealth fund or an SWF which is a fund owned by the state or its divisions.
  • Category II or moderate-risk: This includes mutual funds, insurance firms, banks, and pension funds among others.
  • Category III or high-risk: This type of foreign portfolio investment includes all other FPIs that don’t fall into the first two categories. They could include charitable organisations such as trusts or societies, endowments or trusts among others.

However, as per a new notification in the second half of 2019, SEBI has sought to reclassify the categories and simplify norms. Accordingly, FPIs would come under two categories. All those entities or funds that were earlier registered as Category III are now Category II, accordingly, and Category I is a mix of the earlier Category I and II.

What are the benefits of foreign portfolio investment?

  • Foreign portfolio investments boost demand for the stock of companies and help them when it comes to raising capital at low costs.
  • The presence of FPI would mean a significant rise in the depth of the secondary market.
  • From the investor’s perspective, it helps an investor add more diversity to their investments and benefit from such a diversification.
  • Investors can also gain benefits from exchange rate changes.
  • Overseas markets provide investors a chance to a bigger market that may also sometimes not be as competitive as their home market. This means they benefit from the lower competition in a foreign country.
  • A huge advantage of FPI is that it is liquid, ensuring that the investor is empowered and can move fast when there are good opportunities.

However, on certain occasions, FPI may come with some disadvantages. 

  • To the country receiving FPI, ie, the host, the unpredictability of such investments would mean a constant shift between markets over short periods. This gives rise to some amount of volatility.
  • A sudden withdrawal of FPI could make an impact on the exchange rate. FPI may be risky at certain occasions, ie, when there is political instability in a country.

In conclusion

Foreign portfolio investments are investments made by those interested in diversifying their portfolios by investing in shares, bonds, mutual funds or other assets/securities in a foreign country. Typically, growing economies with a lot of scope for growth see greater FPIs. FPI is significant because it drives the stock markets and boosts the liquidity of capital markets of the host country. Now that you know what is FPI, you could consider investing in a foreign economy and make your investments more diverse and benefit from international credit and exchange rates.