Foreign Portfolio Investment (FPI) involves an investor buying foreign financial assets. It involves an array of financial assets like fixed deposits, stocks, and mutual funds. All the investments are passively held by the investors. Investors who invest in foreign portfolios are known as Foreign Portfolio Investors.
Foreign Portfolios increase the volatility. As a result, it leads to increased risk. The intent of investing in foreign markets is to diversify the portfolio and get some handsome return on investments. Investors expect to receive high returns owing to the risk they’re willing to take. Foreign Portfolio Investment is a prominent investment alternative nowadays. From individuals and businesses to even Governments invest in Foreign Portfolios.
This article will take you through the benefits of foreign portfolio investment, categories of foreign portfolio investment, criteria of FPI, and various risks associated with it.
Benefits of Foreign Portfolio Investment
Portfolio diversification: Foreign portfolio investment provides investors with an easy opportunity to diversify their portfolio internationally. An investor would diversify their investment portfolio to achieve a higher risk-adjusted return, which is ultimately done to help generate alpha.
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.
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.
Types of FPI
Category I: This includes investors from the Government sector. Such as central banks, Governmental agencies, and international or multilateral organizations or agencies.
Category II: This consists of organisations that don’t fall into the above category like charities, trusts, societies, endowments, individuals, family offices, and so on. These are high-risk investors.
A Foreign Portfolio Investment consists of investing in stocks, bonds, mutual funds and ETFs of a foreign country. It allows the investor to diversify their portfolio and take advantage of growth opportunities abroad. These funds are highly liquid but come with risks of exchange rate and political situations.
Who regulates FPI in India?
Securities and Exchange Board of India (SEBI) operates the FPIs. Recently, SEBI has introduced the Foreign Portfolio Investors Regulations, 2019. FPIs also need to follow the Income-tax Act, 1961 and Foreign Exchange Management Act, 1999.
Risks involved in FPI
Low Liquidity: In developing countries, the capital market liquidity often tends to be low resulting in higher price volatility.
Factors affecting FPI
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. A higher tax rate reduces the return on investments. Hence, investors prefer to invest in countries which have lower tax rates.
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.
Do FPIs need to enrol with SEBI?
there is no need for FPIs to directly register from SEBI. The Registration can be granted by a designated depository participant (DDP) instead of SEBI.
How long is the FPI registration valid?
The validity period of the FPI registration is permanent unless suspended or cancelled by SEBI or surrendered by the FPI, however, this is subject to payment of the applicable renewal fee during every three-year block.