Being a developing nation, India’s total capital requirements can’t be met with its internal resources alone. Hence, its foreign investments become a crucial part when it comes to supplying capital to the country. Both foreign and domestic investments can drive the Indian stock market. They are impacted by the political and economic status of the nation. The two most popular ways of supplying capital to the country are foreign direct investments (FDI) and foreign portfolio investments (FPI). Here is the difference between FDI and FII and FPI.
What is FDI vs FII vs FPI?
Since retail investors have started investing in the different types of foreign investments, they should be clearly aware of the subtle difference between FDI and FII and FPI.
– FDI implies that foreign investors are directly investing in the productive assets of another nation.
– On the other hand, there is no difference between FPI and FII. Foreign institutional investors (FII) are single investors of a group of investors that brings in foreign portfolio investments. Hence, they are one and the same. They involve investing in financial assets like the bonds and stocks of another country.
While there are commonalities between FDI vs portfolio investments from institutions, they are different in many ways. Nations with a higher level of FPI can easily encounter higher market volatility and turmoil with respect to currency during uncertain times. They are insurance companies, hedge funds, mutual funds, and pension funds internationally that invest in Indian equities. They partake in the secondary market of India’s economy. To participate in India’s market, FIIs must get themselves vetted and accredited by SEBI, the Securities and Exchange Board of India.
Features of FDI vs FII vs FPI
Here is a set of differences between foreign direct investments and foreign institutional investments.
FDIs tend to invest in productive assets like machinery and plants for their business. The value of these assets increases with time. Foreign institutional investments put their money into financial assets like the bonds, mutual funds, and stocks of the nation. The value of these financial assets may increase, or decrease with time depending upon the company in charge, economic, and political consensus.
2. Investment Tenure for FDI vs FII vs FPI
Foreign director investors tend to take a longer-term approach to their FDI investments. It can take anywhere between 6 months to a couple of years to advance from the planning stage to the project implementation stage. The difference with respect to foreign portfolio investments of FIIs is that the investors for these types of foreign investments have a much shorter investment horizon. FIIs may be invested for the long haul however, the investment horizon continues to remain small, especially when one’s local economy is turbulent. Thos second point of difference between FDI and FII and FPI is closely tied to the third difference of liquidity.
3. Liquidity of FDI vs FII vs FPI Investments
Due to the length of the investment horizon, FDI investors also cannot depart as easily from their investments as FII portfolio investments. FDI assets can even be considered larger and definitely less liquid than FII portfolio investments. Lack of liquidity reduces the buying power of an investor and increases the risk. This is why investors prepare for long periods before investing in FDI assets.
FII portfolio investments are both widely traded and highly liquid. An FPI investor has the luxury of exiting their investment with a few clicks of their mouse. Hence, these types of investments do not require as much planning and may also be considered more volatile due to being highly liquid. The liquidity of an asset is a factor of how widely traded it is and also how volatile it is. FDI can prove to be a more stable investment than FPI especially for a nation to attract foreign investment.
4. Control Exercised in FDI vs FII vs FPI
Investors who look into FDI can usually exercise a higher degree of control than those who invest in FIIs. In general, FDI investors are actively involved in the management of their investments. FDI investors take controlling positions in two ways: either through joint ventures or in domestic firms. FII investors tend to take on more passive positions in their investments. FIIs are considered passive investors and aren’t involved in the day-to-day functioning and operation as well as strategic planning required by any domestic companies.
Here are some of the key differences between FPI and FII: FPI is a broader category that includes FII, as well as other smaller and individual investors.FII is a specific type of FPI that involves only institutional investors.
FPI and FII differ in their nature, scope, and regulatory aspects. FPI involves passive investments by individuals and institutions seeking diversification. FII entails more active involvement by institutional investors with the potential to influence market dynamics.
Category I FPIs include government entities, central banks, sovereign wealth funds, and international organizations such as the World Bank and IMF. Category II FPIs are financial institutions such as banks, asset management companies, investment managers, and pension funds.
Introduction to Foreign portfolio investment (FPI)
Foreign portfolio investment (FPI) comprises securities and other financial assets held by investors in a different country. It does not present the investor with direct ownership of a company's assets and is relatively liquid based on the volatility of the market.
They have the ability to contribute to our economy's growth. Since they are not Indian companies, foreign institutional investors must register with SEBI and follow its rules. FIIs are also known as FPIs (Foreign Portfolio Investors).
Foreign portfolio investment (FPI) refers to the purchase of securities and other financial assets by investors from another country. Examples of foreign portfolio investments include stocks, bonds, mutual funds, exchange traded funds, American depositary receipts (ADRs), and global depositary receipts (GDRs).
A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country. Foreign portfolio investment (FPI) instead refers to investments made in securities and other financial assets issued in another country.
Investors in FPI aim to capitalize on short-term market opportunities and may buy or sell financial assets frequently based on market conditions. Risk and Return: FDI carries a higher level of risk as it involves a long-term commitment and direct involvement in the operations of the company.
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The Qualified Foreign Investor (QFI) is a subcategory of FPI and refers to any foreign individuals, groups or associations, or resident, however, restricted to those from a country that is a member of the Financial Action Task Force (FATF) or a country that is a member of a group which is a member of FATF and a country ...
Be a resident Indian according to the Income-tax Act 1961. Not be a citizen of a country on the FATF's public statement. Be eligible to invest in foreign securities. Hold the necessary approval from MOA / AOA / Agreement for securities investment.
FII stands for foreign institutional investor, which is a subset of FPI. FII refers to investments made by foreign institutional investors in Indian securities. It is a specific type of FPI that involves only institutional investors, not individual or small investors.
Foreign portfolio investment (FPI) involves holding financial assets from a country outside of the investor's own. FPI holdings can include stocks, ADRs, GDRs, bonds, mutual funds, and exchange traded funds.
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Both Foreign Direct Investment FDI and Foreign Institutional Investor FII are related to investment in a country. Which one of the following statements best represents an important difference between the two ? a FII helps bring better management skills and technology while FDI only brings in capital.
Foreign portfolio investment (FPI) consists of securities and other financial assets held by investors in another country. It does not provide the investor with direct ownership of a company's assets and is relatively liquid depending on the volatility of the market.
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