There is no lack of financial instruments in which investors can make lucrative investments to earn high returns. Depending on the risk, the liquidity, and the investment tenure, investors often create a well-balanced portfolio of different financial instruments that helps them maximise their profit. Individuals, businesses and even governments invest in foreign investment portfolios for a more diversified investment option.
Foreign investments help investors tap into opportunities present outside their own country while contributing to the funds of an upcoming country.
What is Foreign Portfolio Investment (FPI)?
You must be wondering what is Foreign Portfolio Investment. Foreign Portfolio Investment (FPI) means a collection of fixed deposits, stocks, mutual funds, and other countries’ financial instruments. Though the investor does not have direct ownership in a Foreign Portfolio Investment, this asset is considered a liquid asset but is constantly affected by a volatile market.
FPI is a good indicator of the market performance of the foreign country and shows how many foreign funds the country can generate. This helps gauge the promise the country is showing and helps raise international funds for boosting growth.
- Foreign Portfolio Investment (FPI) is an investment in a different country’s financial instruments
- Foreign Portfolio Investment (FPI) can be a collection of different financial instruments like securities, bonds, etc
- Investments in FPIs are passive since investors do not directly own any stake in a company
Example of Foreign Portfolio Investment (FPI)
Some examples of Foreign Portfolio Investment (FPI):
- Mutual Funds
- Exchange Traded Funds
- American Depositary Receipts
- and Global Depositary Receipts
Benefits of Foreign Portfolio Investment
Adding international funds diversifies investments to a great extent. The point of diversification is to ensure that the current market situation doesn’t deplete all funds at once. Investing in financial instruments out of the ambit of impact will create a nice hedge against adverse domestic conditions.
Through FPI, you can invest in markets outside your country as well. This increases the profit chances and horizons for the investor.
Access to a Bigger Market
Some opportunities may appear in the global market, not in the domestic market. FPIs can help investors make the most of such opportunities. Foreign markets may also be less competitive and more stable than domestic markets, which are a great attraction for FPIs.
FPIs can be bought and sold seamlessly. This helps investors scout lucrative investment
opportunities and invest in the FPIs of countries showing the most promise.
Exchange Rate Benefit
One of the biggest advantages of investing in foreign funds is the exchange rate difference, which might favour the investor. Investing in a strong currency can help investors secure their funds despite their volatile currency.
Types of Foreign Portfolio Investment
Now that we have understood foreign portfolio investment let us understand the types of foreign portfolio investment. Based on an investor’s risk appetite, Foreign Portfolio Investments are divided into three main categories.
Category I – Includes financial instruments backed by the Indian government or other authorities like the Central Bank of a country. This is an extremely low-risk category.
Category II– Includes mutual funds, insurance policies, bank deposits, and other financial instruments carrying medium risk.
Category III – A high-risk category which covered all the Foreign Portfolio Investments not included in the other two categories. Charitable trusts and endowments form a part of this category.
Who Regulates FPI in India?
Foreign Investment carries a lot of risks, and therefore, the governments must regulate the foreign investments of the citizens of a country. The Securities and Exchange Board of India (SEBI) manages Foreign Portfolio Investments in India.
There are three acts that any investments in Foreign Portfolio Investment need to comply with.
- Foreign Portfolio Investors Regulations, 2019
- Income-tax Act, 1961
- Foreign Exchange Management Act, 1999
How are Foreign Portfolio Investment in India Regulated?
For the regulation of investment FPI, SEBI is responsible. Security and Exchange Board of India (SEBI). SEBI helps in merging investments from one country to another seamlessly.
Eligibility Criteria for Foreign Portfolio Investment
An FPI should be:
- Someone who is not a resident of India.
- A resident of a nation where the securities market regulator is a signatory of the International Organisation of Securities Commission’s (IOSCO) Multilateral Memorandum of Understanding (Appendix A Signatories) or is a signatory to a bilateral Memorandum of Understanding with the SEBI;
- A resident of a nation where the Central Bank is a member of the Bank of International Settlements (BIS). This is only the case of a bank applicant;
- Legally allowed to invest in securities out of the native country;
- Authorised by the law of the country to invest on their own accord or behalf of clients;
- An eligible individual as per SEBI’s criteria;
- Grant of certificates to the applicant is in the interest of developing the securities market.
- With considerable experience, a spotless track record is professionally and financially competent and maintains a decent reputation for being fair and holding integrity.
An FPI registration is permanent unless it has been suspended or cancelled by SEBI. There is also a renewal fee that is charged every three years.
Factors Affecting Foreign Portfolio Investment
The main reason an investor thinks of making a Foreign Investment is to earn a higher rate of return. Investing in countries that give a higher rate of return directly influences the FPI.
Taxes are a significant hindrance to foreign investments of any kind. If a country offers lower tax rates, they instantly become a popular choice for FPIs.
A country’s position plays an integral factor in determining the risk involved and the fund’s liquidity.
What is the Difference Between FPI and FDI?
Foreign direct investment (FDI) stands for an investment which is made by an individual or a firm. FDI takes place from one country to another, FDI allows you to invest in another country’s markets.
Foreign Portfolio Investment (FPI) involves investments made in the form of security and other financial assets issued in other countries.
Although, both these investment methods are vital for the overall growth of global trade and development.
Risks Involved in Foreign Portfolio Investment
A sudden increase in geopolitical tensions could make the FPI extremely volatile. Even a change in government could lead to a change in investment policies which directly affects the FPIs.
Fluctuating Currency Exchange
While the currency fluctuation could work out in favour of the investor, it could result in a massive decline if it goes the opposite way. A constantly changing currency will make it difficult for investors to plan.
Though developing countries may show a lot of promise and a huge scope for improvement, these countries often face liquidity issues that will impact the liquidity of FPIs.
The benefits of investing in an FPI extend to zero Security Transaction Tax (STT), zero Commodity Transaction Tax (CTT), Zero Long Term Capital Gain (LTCG) tax and zero Stamp Duty charges. Investments in FPIs from countries with a Double Tax Avoidance Agreement (DTAA) with India will benefit investors. Their tax burden in India will be reduced if they are taxed in a foreign country.
FPIs are lucrative investment options for those who wish to add foreign investments to their portfolio. However, choosing the right FPI requires a lot of research and an in-depth understanding of the risk involved. Choosing the right country to invest it is makes a huge impact on the returns investors can see from their FPIs.
Non-regulated organisations will fall under the Category III of the FPIs.
A single FPI needs to be less than 10% of the company’s equity.
Only one depository account can be held for all FPIs and related transactions.
The Securities Lending and Borrowing program of SEBI has regulations through which investors can borrow and lend funds as long as they comply with the regulations.
Pension funds and university funds are included in Category I of the FPIs.
Charitable funds can be included in Category II of the FPIs.
No, it is not a compulsion to register under SEBI.
FPI registration is valid for a lifetime, unless the registration is suspended in between by SEBI.
Yes, it it possible to do foreign portfolio investments in India.
Foreign portfolio investment helps boost the liquidity of capital markets.
Top advisors recommend having 15%- 25% in foreign stocks.
It depends on the investor and the amount of risk they are willing to take. FDI is risky and high-cost.
Also, read about ELSS Funds on Investment Simplified.