Foreign Portfolio Investment (FPI)

Explore opportunities for investing in foreign markets. Diversify your portfolio and potentially increase returns with international investment options.
Foreign Portfolio Investment (FPI)
3 min
16-March-2024

FPI is an acronym commonly heard in the stock market, but what is FPI?

Foreign portfolio investment or FPI, is the act of laying out money in financial assets from foreign countries. It helps you in diversifying your investment portfolio on an international level. An FPI usually comprises assets such as stocks and bonds and cash equivalents such as government-issued treasury and savings bonds, money market funds and marketable securities. India has over 10,800 FPIs, most of which comprise funds. All investments are passively held by the investors.

This article will help you understand what is foreign portfolio investment, its benefits, and the policies associated with it.

What is foreign portfolio investment (FPI)

FPI means holding securities and other financial assets in another country. It does not grant the investor direct ownership of a company's assets and is fairly liquid depending on the market volatility. Similar to FDI, FPI is one of the common ways to invest in an overseas economy. If an investor is interested in opportunities outside their own country, they will most likely turn to an FPI. Investors who come under this category are known as foreign portfolio investors.

If you are looking for a safe investment option, you can consider fixed deposit. They offer guaranteed returns and a fixed interest rate throughout your investment tenure.

Benefits of FPI

  1. Investment diversity
    FPI enables investors to diversify their portfolios and subsequently receive higher returns. For instance, if an investor incurs significant losses in the investment assets of one country, they can accrue profits in the investment assets of another country. This allows them to experience less volatility in their investments and increases the potential for profits.
  2. International credit
    FPIs allow investors to access increased amounts of credit in foreign countries. This enables them to expand their credit base and secure their line of credit. They benefit from having an international credit score if the home country’s credit score is unfavourable. With this, they can capitalise on the opportunity and achieve high returns on equity investment.
  3. Access to a wider market
    Foreign markets can sometimes be less competitive than the domestic market. FPI provides exposure to a larger market. Foreign markets are less saturated and, hence, may offer higher returns alongside greater diversity.
  4. High liquidity
    FPIs provide higher liquidity, which allows investors to seamlessly buy and sell foreign portfolios. This gives them greater buying power to act when the right purchase opportunities arise.
  5. Exchange rate benefit
    Investors can benefit from the dynamic nature of international currencies. Since some currencies can drastically fall or rise, a strong currency can be used in their favour.

If you are looking to diversify your investments portfolio, Fixed Deposit (FD) can be a good choice. FDs provide a fixed interest rate throughout the investment period. Interest rate on FDs does not change with market fluctuations. NBFC’s like Bajaj Finance offers one of the highest rate of up to 8.85% p.a. on their Fixed Deposits.

Policies for foreign portfolio investment

Foreign portfolio investments are subject to certain regulatory requirements, which can differ from country to country. India's dependence on FPI means that regulatory compliance will remain at the forefront of its operations. Let us have a look at some of the policies for foreign portfolio investments in India.

  • FPIs are regulated by the Securities and Exchange Board of India (SEBI), which introduced the Foreign Portfolio Investors Regulations in 2019. FPIs also need to comply with the Income Tax Act of 1961 and the Foreign Exchange Management Act of 1999.
  • Foreign investors can make investments in Indian shares through foreign portfolio investment, with no restrictions on investing in Indian companies. However, FPIs are subject to certain taxes and disclosure requirements.
  • Investors, whether individuals or firms, have to be registered with India’s markets regulator to invest in shares of India’s listed companies. Additionally, they must comply with the country’s disclosure requirements.
  • An FPI cannot hold more than 10% of a listed company. If it does, it gets categorised as foreign direct investment, for which there are restrictions in certain sectors.
  • All FPIs in India must be in Indian Rupees and carried out via brokers. All foreign portfolio investment transactions are taxable as per the taxes applicable to domestic investors. The short-term capital gains of less than a year are taxed at 15%, and long-term holdings at 10%, along with a surcharge and securities transaction tax.

Conclusion

Foreign Portfolio Investments are a vital component of India’s economic landscape. They have gained prominence across India as a means of portfolio diversification. They provide several advantages, such as capital influx and liquidity.

Moreover, India's stock markets are now ranked the fourth largest in the world. FPIs have become an important source of investment capital in the country. Foreign investors have boosted the Indian equity markets, recording an influx of around Rs. 1.5 lakh crore in 2023, which can be attributed to the country's resilient economy. As per experts, this positive trend is likely to continue in 2024. The growing prominence of FPI means the country is expected to continue to attract foreign investors.

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Disclaimer

As regards deposit taking activity of Bajaj Finance Ltd (BFL), the viewers may refer to the advertisement in the Indian Express (Mumbai Edition) and Loksatta (Pune Edition) furnished in the application form for soliciting public deposits or refer https://www.bajajfinserv.in/fixed-deposit-archives
The company is having a valid Certificate of Registration dated March 5, 1998 issued by the Reserve Bank of India under section 45 IA of the Reserve Bank of India Act, 1934. However, the RBI does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

For the FD calculator the actual returns may vary slightly if the Fixed Deposit tenure includes a leap year.