What is the Full Form of FPI

FPI: Foreign Portfolio Investment

FPI stands for foreign portfolio investment. A foreign portfolio investment (FPI) entails the acquisition of overseas financial assets by the investor. It includes diverse types of financial assets, which includes mutual funds, stocks, and fixed deposit accounts. The investors keep their investment in a passive manner. Overseas Portfolio Investors are those who make investments in foreign portfolios.

The volatility is increased by foreign portfolios. It results in higher risk as a result. The main objective of investing in international markets is to diversify the portfolio and get a big return. Nowadays, a popular investment option is foreign portfolio investing. Foreign portfolios are held by everyone from people and companies to governments. The advantages of foreign portfolio investments, types of FPIs, FPI criteria, and numerous hazards connected to them are all covered in this article.

Benefits of Foreign Portfolio Investment

1. Investment Diversity:

Investors have the chance to diversify their portfolios through FPI. You can invest your portfolio as an investor to get big profits. Let us say that if you suffer significant losses in investments made in Country X, you can make money in investments made in Country Y. By doing this, you can reduce the volatility of your investments and boost your chances of making money.

2. International Credit:

In foreign nations, investors can obtain larger quantities of credit. They could expand their credit portfolio. Investors can secure their credit line by increasing their credit base. Having an international credit score can be good if the domestic credit score is not in the favour. As a result, the investor can increase his or her use of leverage and obtain high returns on equity.

3. Access to a Bigger Market:

Foreign markets can occasionally be less competitive than domestic ones. Consequently, this will expose you to a larger market. Foreign markets may offer higher returns and more variety because they are less saturated than domestic markets.

4. High Liquidity:

Investments in foreign portfolios offer significant liquidity. Foreign portfolios can be bought and sold easily by an investor. This gives investors the ability to act when good purchasing chances present themselves. Investors have rapid and easy access to buying and selling trades.

5. Exchange Rate Benefit:

An investor can get benefit when the currencies of different countries get fluctuate. Some currencies can fluctuate sharply up or down, and a strong currency might be advantageous for investors.

Categories in Foreign Portfolio Investment

These are some categories which are available for FPI registration:

Category 1: In this category the investors come from the public sector. Central banks, governmental institutions, and international or multilateral organisations and agencies are a few examples of this category.

Category 2: Regulated huge funds, like mutual funds, investment trusts, and insurance/reinsurance firms. Regulated banks, asset management firms, portfolio managers, investment advisors, and managers are also included in this category.

Category 3: People who fall into this category are ineligible for the first two categories. Endowments, charitable societies, trusts for philanthropic purposes, foundations, corporations, trusts, and private people are included.

Regulation of FPI in India

The SEBI, or Securities and Exchange Board of India, oversees managing the FPIs. SEBI just revealed the Foreign Portfolio Investors Regulations, 2019. FPIs are also subject to the Income-tax Act of 1961 and the Foreign Exchange Management Act of 1999.

Eligibility Criteria of FPI

To register as an FPI, a person must complete the requirements listed below:

• Non-resident Indian should not applicant of FPI, according to the Income-tax Act of 1961.
• Should not be a national of a nation covered by the FATF's public declaration.
• Must be qualified to purchase securities outside of the nation.
• He or she needs the MOA, AOA, or Agreement's approval before investing in securities.
• A document stating that the applicant has growth of the securities market.

Factors affecting Foreign Portfolio Investment

Here are some factors affecting Foreign Portfolio Investment:

1. Growth Prospects:

A nation's economy is the main key to attract international investment. Investors have more chances to invest in a nation's financial assets if its economy is strong and big. On the other hand, Investors tend to reduce their investments if the nation experiences financial instability or a recession.

2. Interest Rates:

A high return on investment is what investors seek. As a result, investors favour investing in nations with high interest rates.

3. Tax Rates:

Capital gains are subject to taxation. As a result, investors choose investing in nations with lower tax rates.

Who Invests through FPI?

Through FPI, individual investors can invest in opportunities located abroad. It does not directly transfer ownership of a company's assets to investors.

What is Surcharge?

A surcharge is an extra fee or tax.

What is FPI Surcharge?

The Indian government recommended raising the tax surcharge for such extremely wealthy taxpayers who make more than Rs 2 crore annually in 2019. In doing so, the government expanded the scope of the higher fee to encompass all individuals and associations of persons (AOPs). As a result, if they made more than Rs 2 crore a year in income, they would be liable to the higher tax surcharge. Investors were alarmed by the decision since the surcharge would have affected 40% of FPIs.

However, on 23 August 2019, Finance Minister Nirmala Sitharaman has removed the increased surcharge on FPIs in response to demands from foreign investors. Risk involved in Foreign Portfolio Investments Foreign portfolio investments come with some risks, both for the investors and the host nation. Here are some of its risk-

1. Political Risk Exposure:

Political risk could arise because of the altered political climate. As a result, investment standards, economic principles, and repatriation laws alter.

2. Low Liquidity:

Low capital market liquidity in emerging nations frequently results in higher price volatility.

FPI vs. Foreign Direct Investment (FDI)

When it comes to FPI, unlike with other types of portfolio investments, an investor does not actively manage the investments or the companies that issue the investments. They do not have direct control over the businesses or properties.

FDI, on the other hand, enables an investor to buy a direct business interest in a foreign nation. Consider the scenario when a New York City-based investor buys a warehouse in Berlin to rent to a German business that needs more room to grow. The investor wants to build a long-term income stream and contribute to the business's growth in earnings.

This FDI investor oversees their financial investments and frequently actively runs the business they invest in. The investor supports the business' development while anticipating a return on their investment (ROI). However, the investor faces less liquidity and greater risk when attempting to sell this stake because their money is invested in a corporation. The investor must also consider the risk of currency exchange, which could result in a decline in the investment's value when translated from the local currency to either the home currency or U.S. dollars. Political risk is another concern that could make his investments and the foreign economy unstable.

Advantages: Easily accessible to retail investors; faster return on investment; high liquidity.

Disadvantages: no direct management of assets; volatile; potential for economic disruption (if withdrawn).

Foreign portfolio investments are subject to some of these hazards, albeit to a smaller extent than foreign direct investments. The FPI investments are naturally more marketable because they are financial assets rather than real estate or a direct ownership part in a company. FPI offers the investor the chance for a quicker return on his investment-or a quicker exit-because it is more liquid than FDI. FPI assets, like most investments with a short-term horizon, can experience volatility.

When there is uncertainty or sad news in a foreign country, FPI money frequently leaves the investment country, which can exacerbate economic problems there. Foreign direct investments (FDI) are more accurate for institutional investors, high-net-worth individuals, and businesses while foreign portfolio investments are more suitable for the typical retail investor. These substantial investors, however, might also use foreign portfolio investments.

Example of Foreign Portfolio Investment (FPI)

In terms of FPI, 2018 was an excellent year for India. The number of investment funds registered with the Securities and Exchange Board of India (SEBI) has been increased by more than six hundred and reaches to 9,246 in total. Foreign investors' interest was sparked, in part, by the recent superior performance of Indian shares and an easier regulatory environment.

Conclusion

A popular method of investing in foreign economies is through foreign portfolio investment (FPI). It consists of financial assets and securities owned by foreign investors. Stocks or American Depositary Receipts (ADRs) of corporations based in countries other than the investor's own are examples of securities (in FPI). It also includes mutual funds and exchange-traded funds (ETFs) that invest in foreign or in international assets, as well as any bonds or other debt issued by these businesses or by governments. Foreign portfolio investment is reflected on a country's balance of payments (BOP) and its capital account at the macroeconomic level. BOP determines how much money moves from one nation to another during a fiscal year. Depending on the state of the market, FPI is comparatively liquid.