What Is Foreign Portfolio Investment – FPI?

Foreign portfolio investment (FPI) consists of securities and other financial assets held by investors in another country. It does not provide the investor with direct ownership of a company's assets and is relatively liquid depending on the volatility of the market.

Along with foreign direct investment (FDI), FPI is one of the common ways to invest in an overseas economy. FDI and FPI are both important sources of funding for most economies.

Understanding Foreign Portfolio Investment

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 or American depositary receipts (ADRs) of companies in nations other than 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.

An individual investor interested in opportunities outside their own country is most likely to invest through an FPI. On a more macro level, foreign portfolio investment is part of a country’s capital account and shown on its balance of payments (BOP). The BOP measures the amount of money flowing from one country to other countries over one monetary year.

Key Takeaways

  • Foreign portfolio investment (FPI) involves holding financial assets from a country outside of the investor's own.
  • FPI holdings can include stocks, ADRs, bonds, mutual funds, and exchange-traded funds.
  • Along with foreign direct investment (FDI), FPI is one of the common ways for investors to participate in an overseas economy, especially retail investors.
  • Unlike FDI, FPI consists of passive ownership; investors have no control over ventures or direct ownership of property or a stake in a company.

FPI vs. Foreign Direct Investment – FDI

With FPI—as with portfolio investment in general—an investor does not actively manage the investments or the companies that issue the investments. They do not have direct control over the assets or the businesses.

In contrast, foreign direct investment (FDI) lets an investor purchase a direct business interest in a foreign country. For example, say an investor based in New York City purchases a warehouse in Berlin to lease to a German company that needs space to expand its operations. The investor’s goal is to create a long-term income stream while helping the company increase its profits.

This FDI investor controls their monetary investments and often actively manages the company into which they put money. The investor helps to build the business and waits to see their return on investment (ROI). However, because the investor’s money is tied up in a company, they face less liquidity and more risk when trying to sell this interest. The investor also faces currency exchange risk, which may decrease the value of the investment when converted from the country’s currency to the home currency or U.S. dollars. An additional risk is with political risk, which may make the foreign economy and his investment shaky.

Pros

  • Feasible for retail investors

  • Quicker return on investment

  • Highly liquid

Cons

  • No direct control/management of investments

  • Volatile

  • Cause of economic disruption (if withdrawn)

Although some of these risks affect foreign portfolio investments as well, it is to a lesser degree than with foreign direct investments. Since the FPI investments are financial assets, not the property or a direct stake in a company, they are inherently more marketable.

So, FPI is more liquid than FDI and offers the investor a chance for a quicker return on his money—or a quicker exit. However, as with most investments offering a short-term horizon, FPI assets can suffer from volatility. FPI money often departs the country of investment whenever there is uncertainty or negative news in a foreign land, which can further aggravate economic problems there.

Foreign portfolio investments are more suited to the average retail investor, while FDI is more the province of institutional investors, ultra-high-net-worth individuals, and companies. However, these large investors may also use foreign portfolio investments.

Real World Example of Foreign Portfolio Investment

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.