Foreign Portfolio Investment: An Introduction

Being a part of the financial industry, there are terms that you should familiarize yourself with. One of these is the foreign portfolio investment.

You might have heard of this term before but haven’t paid much attention to it. We’ll now be discussing what FPI actually is and how it can affect you.

What is a Foreign Portfolio Investment?

A Foreign Portfolio Investment is made up of securities and other financial assets that are passively held by foreign investors. Owning such will not give you direct ownership of financial assets and is actually relatively liquid depending on the liquidity of the market.

With FPI, you will be investing mostly in financial assets like bonds and stocks of companies that are located overseas. You also have a short time frame for investment returns. FPI investors, most of the time, expects quick profits on their investments.

FPIs are also easier to sell since they offer higher liquidity and can be easily accessed by average investors since it only needs a small amount of investment capital.

Pros and Cons of Foreign Portfolio Investment

Advantages

Gain access to a bigger market
Home markets found in the United States, have become very competitive since more and more businesses offer similar services. On the other hand, foreign markets offer slightly less competitive but sometimes larger market.

For instance, a business may make more sales by selling clothes in South Korea than it does in the entire United States.

Reap benefits from exchange rates
International currency exchange rates constantly fluctuate. Sometimes your home country’s currency may be strong while there are other times when it’s weak.

There are times when having a stronger currency in the foreign country where you have a portfolio can benefit you as an investor.

Diversify your portfolio

Portfolio diversification is an important practice that you should familiarize yourself with especially when it comes to long term investing. Foreign Portfolio Investments will provide you with the opportunity to diversify your portfolio with the use of international assets.

The way the global stock market works make it possible for the same factors at a given time will have different effects to the markets located at different countries. This means that if you have stocks in different countries, you will have the opportunity to experience less volatility over you entire portfolio.

You can also gain the opportunity to apply cross country hedging when it comes to currencies, industries, and geographical locations.

Access international credit

Having Foreign Portfolio Investments in various foreign countries mean that you can access a broader credit base. This is because you can also access credit in foreign countries where you hold a significant amount of investments.

This can be of help to you for times when credit sources available in your home country proves to be too expensive or that they are unavailable due to various factors.

Disadvantages

Political factors
There is always the risk of changes in the political environment of a certain country you invested in. Political risks can result in changes in investment norms as well as repatriation regulations.

Low retail participation

This is something that emerging markets – which are mostly the beneficiaries of Foreign Portfolio Investments – might suffer from. This can then result to inadequate liquidity which then turns to price volatility.

Unpredictable nature of assets

With this, there is a tendency for investors to shift from one market to another at short intervals. The resulting volatility from the Foreign Portfolio Investments’ inflows and outflows can have adverse effects to the host country’s economy.

Test your skills in stock trading at FSMSmart! We will provide you with daily market updates and help you stay up-to-date with economic events. Register for an account now!