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Foreign Portfolio Investment (FPI) is a form of capital flow whereby investors from one country invest in foreign financial instruments such as stocks, bonds and mutual funds. The portfolio investment is typically done to diversify the investor's portfolio by investing in the different economies’ markets, gaining exposure to different currencies, or taking advantage of different pricing due to geographical differences in supply and demand. FPI is essentially a passive investment in a foreign country, with no direct ownership of property or a stake in a company.
FPI can be classified as either direct or indirect. Direct investments in FPI involve the purchase of financial instruments of companies or governments in the foreign country, such as stocks, bonds, and mutual funds, while indirect investments in FPI involve investing in foreign markets through collective investment schemes like ETFs (exchange-traded funds). It is important to note that both direct and indirect investments in FPI instruments are generally done for portfolio diversification for retail investors, rather than for achieving direct control over companies or their operations.
Another important characteristic of FPI is that it is often quite liquid, so portfolio managers are able to make quick and easy adjustments to the composition of their portfolios depending on market conditions. This is particularly useful since global markets can be quite volatile and investments that may seem advantageous in one market could swiftly become an outsized risk if conditions shift.
In conclusion, Foreign Portfolio Investment (FPI) is a type of capital flow in which investors from one country purchase foreign financial instruments such as stocks, bonds and mutual funds for the purpose of diversifying their portfolio in different countries’ markets, gaining exposure to different currency or taking advantage of different pricing due to geographic factors. FPI provides investors with a degree of liquidity and freedom to adjust the composition of their portfolios in response to market conditions.
FPI can be classified as either direct or indirect. Direct investments in FPI involve the purchase of financial instruments of companies or governments in the foreign country, such as stocks, bonds, and mutual funds, while indirect investments in FPI involve investing in foreign markets through collective investment schemes like ETFs (exchange-traded funds). It is important to note that both direct and indirect investments in FPI instruments are generally done for portfolio diversification for retail investors, rather than for achieving direct control over companies or their operations.
Another important characteristic of FPI is that it is often quite liquid, so portfolio managers are able to make quick and easy adjustments to the composition of their portfolios depending on market conditions. This is particularly useful since global markets can be quite volatile and investments that may seem advantageous in one market could swiftly become an outsized risk if conditions shift.
In conclusion, Foreign Portfolio Investment (FPI) is a type of capital flow in which investors from one country purchase foreign financial instruments such as stocks, bonds and mutual funds for the purpose of diversifying their portfolio in different countries’ markets, gaining exposure to different currency or taking advantage of different pricing due to geographic factors. FPI provides investors with a degree of liquidity and freedom to adjust the composition of their portfolios in response to market conditions.