Foreign Portfolio Investment

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  • 06 Oct 2023
Foreign Portfolio Investment

Key Highlights

  • The Foreign Portfolio Investment (FPI) involves the purchase of foreign financial assets by an investor.
  • The FPI is made with a high rate of risk and a high return in mind.
  • Investing in FPI allows investors to spread their money across different countries. As a result, there is less risk of big losses.
  • Political and limited liquidity are the two main risks involved in FPI.

The term ‘Foreign Portfolio Investment’ meaning refers to the purchase and holding of a wide array of foreign financial assets by investors seeking to invest in countries other than their own. Foreign portfolio holders can invest in stocks, bonds, mutual funds, derivatives, fixed deposits, etc. The investments are made with a high rate of risk and a high return in mind. As a result of the increased volatility in share prices, FPI investors also face a higher risk (which varies depending on the country of investment). Therefore, they expect and seek greater rewards from their FPI endeavors.

Even though FPI carries a higher level of risk, there are several factors to consider when assessing the potential benefits compared to the drawbacks. These factors encompass how easy it is to buy and sell FPIs in a particular country, the accessibility to international credit, fluctuations in currency exchange rates, and the economic development and stability of the nation.

Here are the benefits of investing in Foreign Portfolio Investment in India:

  • Investment Diversification FPI allows investors to spread their investments across different countries. This helps reduce the risk of big losses. For example, face significant losses in investments from Country X. You might make profits from investments in Country Y. This way, your investments become less unstable, increasing your chances of making money.

  • Access to International Credit Investors can access more credit in foreign countries, expanding their credit options. This is useful if your credit score in your home country isn't great. Having an international credit score can be helpful, allowing you to use more borrowed money and potentially earn more from your investments.

  • Access to Larger Markets Sometimes, foreign markets are less crowded than domestic ones. FPI exposes you to a larger market. Because foreign markets are less saturated, they may offer higher returns.

  • Increased Liquidity Foreign Portfolio Investments offer good liquidity. You can easily buy and sell foreign investments, giving you the ability to take advantage of good buying opportunities quickly. Investors can make trades swiftly and smoothly.

  • Currency Exchange Benefits Investors can take advantage of the changing values of international currencies. Some currencies can go up or down significantly, and having a strong currency can work in an investor's favor.

To become a registered FPI, an individual needs to meet these criteria:

  • According to the Income-tax Act of 1961, the applicant should not be a non-resident Indian.
  • They should not be a citizen of a country mentioned in the FATF's public statement.
  • They must have the eligibility to invest in foreign securities.
  • To invest in these securities, they need approval from the Memorandum of Association (MOA), Articles of Association (AOA), or an agreement.
  • They should possess a certificate indicating their interest in the development of the securities market.
  • If the applicant is a bank, it must belong to a country with a central bank that is part of the Bank for International Settlements.

Several factors impact Foreign Portfolio Investment:

  1. Economic Growth The strength of a country's economy is a crucial factor. When an economy is thriving and expanding, investors are more likely to put their money into that country's financial assets. Conversely, during economic crises or recessions, investors may withdraw their investments.

  2. Interest Rates Investors aim for high returns on their investments, so they favor countries with high-interest rates.

  3. Taxation Taxes are applied to capital gains, which can reduce investment returns. Therefore, investors often prefer countries with lower tax rates for their investments.

Foreign Portfolio Investments come with risks for both investors and the destination country. Risks include:

  • Political Risk Changes in the political environment can create political risk. This can lead to alterations in investment rules, economic policies, and regulations regarding the repatriation of funds.

  • Limited Liquidity In developing countries, capital markets often have limited liquidity, which can result in higher price fluctuations.

FPIs can be registered in the following categories:

  • Category I: Investors from the government sector are included in this category. Organizations and agencies such as central banks, government agencies, and international organizations.

  • Category II: This category includes : Investment trusts, mutual funds, insurance companies, and reinsurance companies are subject to regulation. This category also includes regulated banks, asset management companies, portfolio managers, investment advisors, and managers.

  • Category III: This category includes those who are not eligible for the first two categories. Among them are endowments, charitable societies, charitable trusts, foundations, corporations, and trusts.

Conclusion

In FPI, you invest in foreign stocks, bonds, and mutual funds. An FPI can provide diversification, international credit access, increased liquidity, exposure to larger markets, and currency exchange benefits. To participate in FPI, individuals and entities need to meet eligibility criteria. An experienced financial provider, Kotak Securities, can assist you with any type of investment.

FAQs on Foreign Portfolio Investment

Among the risks that FPI investors face are those that are caused by volatility in financial markets in different countries, as well as jurisdictional risks such as regulation changes.

The FPI isn't limited to specific individuals as long as the entity meets the requirements. Among these are individuals, enterprises, or organizations, as well as governments.

Yes, Foreign Portfolio Investors (FPIs) can place orders directly through a broker.

FPIs do not need to register with SEBI. Instead of SEBI, a designated depository participant (DDP) can grant registration.

No. For FPI investments, each FPI may open only one depository account. Furthermore, all eligible securities must be purchased and sold through that depository account.

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