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American Depositary Receipts Global Depositary Receipts: Understanding Foreign Portfolio Investment (FPI)

Foreign portfolio investment refers to the purchase of securities like stocks, bonds, and funds from another country for investment purposes. It allows investors to diversify their portfolio across international markets for higher returns and lower risk. Some benefits include investment diversity, access to larger markets, and leverage from currency exchange rates. However, foreign portfolio investment also carries risks such as political instability, low liquidity in some markets, and volatility from interest rate and tax policy changes.

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53 views

American Depositary Receipts Global Depositary Receipts: Understanding Foreign Portfolio Investment (FPI)

Foreign portfolio investment refers to the purchase of securities like stocks, bonds, and funds from another country for investment purposes. It allows investors to diversify their portfolio across international markets for higher returns and lower risk. Some benefits include investment diversity, access to larger markets, and leverage from currency exchange rates. However, foreign portfolio investment also carries risks such as political instability, low liquidity in some markets, and volatility from interest rate and tax policy changes.

Uploaded by

Dev Shah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Foreign portfolio investment (FPI) refers to the purchase of securities and

other financial assets by investors from another country. Examples of


foreign portfolio investments include stocks, bonds, mutual funds,
exchange traded funds, American depositary receipts (ADRs), and global
depositary receipts (GDRs).

Understanding Foreign Portfolio Investment (FPI)


Portfolio investment involves the making and holding of a hands-off—or passive—
investment of securities, done with the expectation of earning a return. In foreign
portfolio investment, these securities can include stocks, american depositary
receipts (ADRs), or global depositary receipts of companies headquartered outside
the investor's nation. Holding also includes 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 Foreign Portfolio Investment


 Investment Diversity
FPI provides investors an opportunity to diversify their portfolio. As an
investor, you can diversify your portfolio to achieve high returns. Suppose if
you incur major losses in investment assets of a Country X, you can accrue
profits in investment assets of a country Y. In this way, you can experience
less volatility in your investments and increase chances of profits.

 International Credit
Investors can get access to increased amounts of credit in foreign countries.
They can broaden their credit base. By expanding their credit base, investors
can secure their line of credit. In case the domestic credit score is
unfavourable, having an international credit score can be beneficial. This
allows the investor to utilize more leverage and get high returns on equity
investment.

 Access to a Bigger Market


Sometimes, foreign market can be less competitive than the domestic
market. Hence, FPI gives you an exposure to a wider market. The foreign
markets are comparatively less saturated and hence, they may offer higher
returns and more diversity as well.

 High Liquidity
Foreign Portfolio Investments provides high liquidity. An investor can buy
and sell foreign portfolios seamlessly. This offers buying power for investors
to act when good buy opportunities arise. Investors can buy and sell trades
in a quick and seamless manner.

 Exchange Rate Benefit


An investor can leverage the dynamic nature of international currencies.
Some currencies can drastically rise or fall, and a strong currency can be
used in investor’s favour.

Factors Affecting Foreign Portfolio Investment


Here are some factors affecting Foreign Portfolio Investment:

 Growth Prospects
The economy of a country plays a crucial role in foreign investments. If an
economy is robust and growing, investors are more inclined to investing in
the financial assets of that country. On the other hand, if the country goes
through a financial turmoil or a recession, investors tend to withdraw their
investments.

 Interest Rates
Investors yearn for a high return on investment. Hence, investors prefer to
invest in countries with high interest rates.

 Tax Rates
The tax is levied on capital gains. Higher tax rates reduces the return on
investments. Hence, investors prefer to invest in countries which have lower
tax rates.

Risks Involved in Foreign Portfolio Investment


Foreign Portfolio Investments has some risks associated with it - for both the
investors and the destination country. Here are a few risks involved in it:

 Political Risk Exposure


The change in the political environment may give rise to political risk. This
results in a change of investment criteria, economic policies, and repatriation
regulations.

 Low Liquidity
In developing countries, the capital market liquidity often tends to be low
resulting in a higher price volatility.
Example of Foreign Portfolio Investment (FPI)
The year 2018 was a good one for India in terms of FPI. More than 600 new
investment funds registered with the Securities and Exchange Board of India
(SEBI), bringing the total to 9,246. An easier regulatory climate and a strong
performance by Indian equities over the last few years were among the factors
sparking foreign investors' interest.

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