Foreign Portfolio Investment or FPI refers to investment made by foreign investors in the financial assets of another country. It includes investments made in stocks, bonds, mutual funds, etc., of a foreign nation. The foreign investor invests in these financial instruments to generate investment returns. It has stakes in equities, bonds and money market tools given by firms in other nations. Global capital flows in foreign direct investment. Foreign portfolio investment plays a vital role in global thrift. 

Foreign Portfolio Investment (FPI) is a vital aspect of the UGC-NET Commerce Examination, which will pupils need to study, as many questions are being asked.

In this article, the learners will be able to know the meaning of foreign portfolio via foreign portfolio investment examples along with other related and vital topics.

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Portfolio Investor

A portfolio investor is an individual or institution that invests in a diverse range of financial assets, typically assembling a portfolio that includes various securities such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other investment instruments. The goal of a portfolio investor is to spread risk across different assets and asset classes to achieve a balanced and potentially more stable return on investment.

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Foreign Portfolio Investment-Introduction

 Foreign portfolio investment means investment by foreign investors in stocks, bonds and other financial assets of firms in another country. Unlike foreign direct investment, foreign portfolio investors do not gain control or managing of the foreign firms they invest in. They only invest in the financial securities of those firms, not the actual assets or operations. They only have the right to financial support. It affects buying equities, bonds and money market tools issued by foreign firms. Portfolio investors have no say in the foreign firms they invest in. They are passive owners of financial assets.

One can buy and sell financial assets quickly, which makes them liquid and short-term. Returns depend on the results of the underlying financial assets like dividend payments, interest income and capital gains. Portfolio trends are dependent on luck rather than strategic plans and analysis.

While feeding capital and growing financial markets, volatile portfolio flows also pose risks for recipient nations. Governments thus handle foreign portfolio investments. This is done via efforts like capital controls and taxes. The goal is to balance the options from stable portfolio inflows with the risks of undue volatility. Properly driven foreign portfolio investment can donate to financial and economic market growth.

Foreign portfolio investment refers to cross-border investment in stocks, bonds and other financial assets given by foreign firms. As fought to direct investment in their real assets and functions.

Types of FPI

The several types of FPI are stated below.

• Equity Investment has bought shares of foreign firms listed on a stock exchange. Equity investment feeds a share in the profits and growth options of the firms.
• Bond Investment: Investors buy bonds issued by foreign governments or firms. Bondholders receive periodic interest charges and get back the principal amount at maturity.
• Money Market Investment: Money market investments refer to highly liquid, safe and short-term investments in securities like Treasury bills, bank CDs, commercial paper, etc. 

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Factors Affecting Foreign Portfolio Investment

The factors affecting foreign portfolio investments have been stated below.

• Economic growth options: Higher growth chances attract more and more investors.
• Interest rates: The more even the return, the more lovely it grows.
• Risk-return tradeoff: Investors feel the likely returns on financial assets in a nation relative to the risks involved when fixing on foreign portfolio investments.
• Currency movements: Depreciation in the local currency makes investments cheaper for foreign investors. It also makes future repatriation of returns better. This boosts inflows.
• Political stability: A nation with a stable political case is chosen for investment. Political tensions can prevent such flows.
• Regulatory environment: Strict laws act as a barrier for other nations' firms to invest.
• Macroeconomic stability: Macro economies of the nation in which the firm is thought to have to have a stable financial culture.
• Financial market development: Financial markets are better able to attract foreign investments if they seem to be.
• Size of local capital markets: Bigger and more liquid domestic capital markets provide greater options for foreign investors to deploy funds profits.
• The volatility of returns: High volatility in the returns on financial assets in a nation makes foreign investors wary and affects inflows of portfolio capital.
• Corruption levels: Higher crime perception means delays and opacity that foreign portfolio investors try to avoid. It deters such flows.
• Capital controls: Rules on capital account transactions like bans, quotas, and taxes can limit foreign portfolio investment inflows.

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Benefits of Foreign Portfolio Investment

The benefits of foreign portfolio investment have been stated below.

• Equips capital for economic growth: Foreign portfolio investment channels foreign savings and money into the domestic economy. This finances corporate growth and government debts, thus helping growth.
• Develops capital markets: Greater foreign participation in the local stock market and bond market leads to higher trading volumes, liquidity and culture in these markets over time.
• Increases competition: The entry of foreign investors raises contest in domestic financial markets. It pushes local players to enhance efficiency and services. This benefits the economy.
• Transfers skills and technology: Foreign portfolio investors bring with them global experiences. Also, technical know-how and market insights get transferred to local capital market players.
• Risk diversification: Portfolio investors get an option to diversify risks. It is done by investing in a wider range of assets across multiple markets. This lowers the volatility of their returns.
• Higher returns for locals: Foreign interest in local assets tends to push up their prices in the short run. It provides gains to existing local investors.
• Better corporate governance: The scrutiny of foreign investors can boost firms to adopt better governance rules and clarity to attract more portfolio inflows.
• Feeds exit option for locals: Foreign portfolio investment equips local investors with an avenue to exit from assets. It is done by selling to foreign investors, thus creating better liquidity.
• Macroeconomic benefits: Stable foreign portfolio inflows can help manage current account deficits, stabilize currency values and build foreign reserves.

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Limitations of Foreign Portfolio Investment

The limitations have been stated below.

• Foreign Ownership Limits
• Sectoral Restrictions
• Regulatory Approval
• Currency Controls
• Taxation Policies
• Trading Restrictions
• Disclosure Requirements
• Anti-Money Laundering (AML) and Know Your Customer (KYC) Regulations
• Political and Economic Stability
• Repatriation Restrictions

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Foreign Portfolio Investment Example

Here are some examples of foreign portfolio investment.

• Foreigners buy stocks listed on the domestic stock exchange, like the NSE or BSE in India. For example, foreign institutional investors in India hold over 20% of the total market capitalization of listed firms.
• Foreign mutual funds and pension funds invest in bonds issued by the government and firms in the local market if about 35% of outstanding government bonds in Japan are held by foreign investors.
• Foreign hedge funds and wealth funds deploy a part of their portfolios in money market tools in the domestic market, like treasury bills.

Factors Affecting International Portfolio Investment

Factors Affecting Global Portfolio Investment:

• Expected returns: This is the most critical factor. Investors allocate capital to nations where they wish to get the highest returns for the level of risk. Higher expected returns attract more portfolio flows.
• Risk level: The risk characteristics of an economy, like political instability, currency risks, default risks etc., influence portfolio investments. Lower risk levels and more stable environments attract more funds.
• Interest rates: Higher domestic interest rates compared to global rates make that economy more attractive for fixed-income portfolio investors. This pulls in more funds.
• Macroeconomic stability: Economies with low and stable inflation, sustainable fiscal deficits and prudent monetary policies are favoured by portfolio investors who seek peace.
• Regulatory environment: Stringent investment rules, restrictions, and taxes reduce portfolio inflows. Less stringent regulations encourage more foreign participation.
• Financial market development: More developed and sophisticated banking and capital markets are better able to attract and manage global portfolio flows.
• Currency stability: Volatile and depreciating currencies worry portfolio investors. It prevents capital inflows. Stable currencies attract more funds.
• Political stability: Political unrest, disputes, and risks deter portfolio investments. In contrast, stable environments and inclusive institutions are biased.
• Market liquidity: More liquid and less volatile financial markets are better suited to absorbing portfolio flows without major disruptions. 
• Global liquidity: Abundant global liquidity and the search for higher yields benefit. Economies that can tap such funds via portfolio investments.

Conclusion

International portfolio investments are driven by economic, financial, institutional and political factors that determine the risk-return dynamics for investors in different economies. No single factor is decisive in isolation. Foreign portfolio investment means any right of financial instruments issued by domestic firms by foreign investors. The above examples show some common ways in which such portfolio flows occur globally.

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