The main difference between FDI and FPI is that FDI, or Foreign Direct Investment, is when investors from one country invest in a company or enterprise in another country to gain a significant ownership stake or control. FPI, or Foreign Portfolio Investment, on the other hand, refers to investing in financial assets like equity, bonds, or other securities of a foreign country’s markets without obtaining a controlling interest in the invested company.
Contents:
- FPI Meaning
- Foreign Direct Investment Meaning
- Difference between FDI and FPI
- Difference Between FDI And FPI – Quick Summary
- FDI vs FPI – FAQs
FPI Meaning
FPI’s full form is Foreign Portfolio Investments. It refers to investing in securities and other assets of a foreign country. FPI involves purchasing stocks, bonds, mutual funds, or exchange-traded funds (ETFs) issued by entities in different countries. For instance, if an investor in India buys shares of Apple Inc., a U.S. company, it would be considered an FPI.
The primary aim of FPI is to quickly generate returns on changes in stock prices and forex rates. FPI is also known for its liquidity and short-term horizon.
Individual investors often use FPI to diversify their portfolios and explore investment opportunities outside their home country. Investing in foreign securities can benefit from the growth and performance of foreign economies and markets.
FPI provides investors access to a broader range of investment options and allows them to participate in the global economy. It can offer potential diversification benefits and opportunities for higher returns.
Foreign Direct Investment Meaning
Foreign Direct Investment (FDI) refers to the investment made by individuals, organizations, or governments from one country into a business or corporation located in another country. For example, Vodafone Group’s investment in India to start Vodafone India Limited is a type of FDI. It involves establishing lasting interest and a significant degree of influence or control by the investor over the foreign company’s operations.
FDI is different from portfolio investment, where investors passively hold securities of foreign companies without seeking control. In FDI, the investor aims to actively manage and influence the foreign company’s activities and decision-making processes. The investment can take various forms, such as acquiring voting stock in a foreign company, establishing new facilities or subsidiaries in a foreign country, entering into joint ventures with local companies, or engaging in mergers and acquisitions.
For the investor, FDI offers opportunities for diversification, access to new markets, growth potential, and potential cost savings. It allows companies to expand their operations internationally, gain market share, and tap into new customer bases.
FDI can be categorized into:
- Horizontal FDI: When a company expands its operations to a foreign country, offering the same services or products as in its home country.
- Vertical FDI: When a company invests in a foreign country by moving to different supply chain stages.
- Conglomerate FDI: When a company invests in a completely unrelated business in a foreign country.
Difference between FDI and FPI
The main difference between FDI and FPI is that FDI involves Investment in a foreign company with control and participation in operations. On the other hand, FPI involves the purchase of financial assets (stocks, bonds) without control or ownership of the company.
| Parameters | Foreign Direct Investment (FDI) | Foreign Portfolio Investment (FPI) |
| Definition | An investment made by a foreign entity in a business enterprise | Investment in financial assets (e.g., stocks, bonds) of a foreign country |
| Volatility | Generally more stable due to more extended investment periods | It can be more volatile and subject to quick changes in investor sentiment |
| Control | Investors have substantial control and can influence company decisions | Investors have limited control and are considered passive investors |
| Liquidity | Less liquid, long-term investment with assets not easily liquidated | Highly liquid, investors can buy or sell assets with ease |
| Investment Horizon | Long-term investment strategy with projects that may take years | Shorter investment horizon, particularly during economic uncertainty |
| Kind of investor | Active | Passive |
| Type of investment | involves investments in financial and non-financial assets, including resources, technology, and securities. | Focuses on financial assets such as stock, bonds, etc. |
| Purpose | Establish long-term business operations | Seek short-term financial gains |
Hopefully this article has helped you understand the functions of FDI and FPI, you might as well be wondering what is FII what is the difference between FDI and FII if so here’s our blog on the difference between FDI and FII
We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, and hence we bring you the important topics and areas that you should know:
Difference Between FDI And FPI – Quick Summary
- The main difference between FDI and FPI is that Foreign Direct Investment (FDI) involves foreign investors making significant investments in enterprises located in different countries to acquire a substantial interest. On the other hand, Foreign Portfolio Investment (FPI) refers to investing in a foreign country’s financial assets, such as stocks or bonds that are available for trading on an exchange.
- Foreign Direct Investment (FDI) involves investing in a foreign company to obtain a controlling interest and actively participate in its operations.
- Foreign Portfolio Investment (FPI) refers to investing in a foreign country’s securities, such as stocks and bonds, without seeking control or ownership of the invested company.
- FDI gives investors substantial control over the invested company and the ability to influence its decisions, while FPI investors have limited control and are considered passive.
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FDI vs FPI – FAQs
After a revision in the Act, there is a requirement to deduct tax at source for dividend income received by Foreign Portfolio Investors (FPIs) at a rate of 20% or as per the favorable rate specified in the applicable tax treaty, whichever is more advantageous.
The primary difference between FDI and FDI inflow is that FDI net inflows represent the amount of foreign investment brought into the country by investors who are not residents of that country. On the other hand, FDI net outflows indicate the amount of domestic investment made by country residents to economies outside their own.
The investment limits for different types of securities and categories of FPIs are subject to variation. SEBI has also set sector-specific limits for FPIs investing in Indian companies. For example, FPIs are restricted from exceeding a 24% investment in the paid-up capital of an Indian company operating in the defense sector.
The major difference between FDI and FPI is that FDI requires a lasting commitment to establish a business presence in a foreign nation. In contrast, FPI is a brief investment endeavor aimed at diversifying investment portfolios and benefiting from the economic growth of foreign countries.
Typically, FDI entails a higher level of commitment and control than FPI, which carries a lower level of risk.
- As of May 2022, Rs. 17.57 lakh crore of FPI investments were made in the US.
- NSDL data shows that Mauritius came in second with Rs. 5.24 lakh crore, followed by Singapore with Rs. 4.25 lakh crore and Luxembourg with Rs. 3.58 lakh crore.
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