A foreign portfolio investor (FPI) is an investor who purchases foreign financial assets. Some of the financial assets involved are fixed deposits, equities, and mutual funds. All of the investments are held passively by the investors. Investors who invest in international portfolios are known as overseas portfolio investors.
A foreign portfolio’s volatility is increased, resulting in significant danger. However, Investing in foreign markets has the purpose of diversifying one’s portfolio while providing a good return. Investors anticipate substantial rewards as a result of the risk they are ready to accept. Foreign portfolio investment has become a popular investment choice in recent years. Individuals, businesses, and even governments own foreign holdings.
Types Of Foreign Portfolio Investment
One can register FPI in one of the below types:
- Investors from the public sector are included. A few examples are Central banks, government institutions, and international or multilateral organizations and agencies.
- Broad-based funds, such as mutual funds, investment trusts, and insurance/reinsurance firms, govern it. It also includes regulated banks, asset management firms, portfolio managers, investment advisors, and managers.
- This category includes those who do not fit within the first two categories. Endowments, charitable societies, charitable trusts, foundations, corporate organisations, trusts, and other entities fall under this category.
Eligibility Criteria for Foreign Portfolio Investment
- To become an FPI – an individual must meet the following requirements:
- According to the Income Tax Act – of 1961, the petitioner cannot be a non-resident Indian.
- He/she must be eligible to invest in securities outside the country.
- To invest in securities, she or he must first acquire consent from the MOA / AOA / Agreement.
- A certificate demonstrating the applicant’s interest in the securities market’s expansion.
- If the bank is the applicant, it must be from a country with a Bank for International Settlements member central bank.
Foreign investment portfolio
Broadening one’s financial portfolio by investing in the international stock market is a good idea. Various investing routes can be used to invest in overseas stocks – global markets or emerging markets. A resident Indian individual can support up to $250,000 each financial year in international markets under the RBI’s Liberalized Remittance Scheme (LRS). Towards the conclusion of the article, we will know how to invest in foreign stocks from India.
One way to invest in international markets is through International Mutual Fund schemes in the form of ETFs or fund of funds that invest in international funds with exposure to global markets. Mutual Funds have a small minimum investment amount and do not require an overseas trading account.
Indian brokers have formed a partnership with overseas brokers.
In terms of offshore investing, many Indian brokerage houses have tie-ups with international brokerages. Check with your current broker to see if they provide similar services.
Brokerage on a global scale
Indians can open accounts with a few international brokerage firms and invest in foreign stocks. These organizations also assist their clients with research and analytics to assist them in making financial decisions.
Many online platforms provide prospects for foreign securities investments through their recommended portfolios or themes. The danger of shifting foreign exchange values is inherent in such ventures. Investors must fill their accounts with US dollars to invest, and the bank may incur international wiring fees.
Factors Affecting Foreign Portfolio Investment
Following are some of the factors affecting FPI.
Prospects for Growth
A country’s economy heavily influences foreign investments. Investors are more likely to invest in the country’s financial assets only if its economy is rising and strong. On the other hand, investors tend to withdraw their assets if the country is experiencing economic instability or turbulence.
Rates of Interest
Investors expect a high rate of return on their investments. So, investors choose to invest in countries where interest rates are high.
Rates of Taxation
Capital gains are subject to the tax. Higher tax rates reduce the return on investment forcing investors to choose to invest in countries where tax rates are lower.
How to Invest in Foreign Stocks from India
You can invest in foreign stocks from India in two distinct ways – Direct investment in stocks or Indirect Investment through ETFs or Mutual Funds.
Direct investments can be done in two different ways
- Open an overseas trading account with a domestic banker
- Open an overseas trading account with a foreign banker
Indirect Investment can be done in many ways but the following three are the most common ones.
- Through ETFs
- Through Mutual Funds
- Investing through the mobile apps
Risks Involved in Foreign Portfolio Investment
Both the investors and the destination country face risks when investing in foreign portfolios. Here are some of the risks involved:
Political Risk Exposure
As a result of the shifting political environment, the political risk may occur. Investment restrictions, economic policies, and repatriation regulations have all changed as a result.
Liquidity is low
In emerging markets, capital market liquidity is often inadequate, resulting in more price volatility.
Foreign portfolio investment is inherently risky, necessitating highly regulated financial markets to efficiently manage the risk. Furthermore, for wise and effective allocation of foreign or domestic capital flows, the financial system must be capable of identifying and reducing risks.
Successful financial intermediation and efficient credit allocation are essential for economic growth and development. The identification and control of business risks can help financial systems stay healthy. In addition, the financial system must be resilient to economic shocks.