Foreign Portfolio Investment: Overview, Benefits, and Riskis
When you invest in the financial instruments of a country outside India, you are making a Foreign Portfolio Investment (FPI). This could be stocks, mutual funds, bonds, derivatives, cash equivalents, and more. Foreign portfolio investments are usually held passively by the investors and are often managed by an investment planner. Lately, foreign portfolio investors have increased given the global market volatility as adding international exposure to your investment portfolio is a great way to hedge risk. There are several other strategic advantages of FPI. Let us look at them.
Benefits of foreign portfolio investments
- Portfolio diversification
One of the biggest benefits of making foreign portfolio investments is access to markets of other countries that are not in perfect sync with the domestic market. For instance, in 2020 when the pandemic broke out, stock markets around the world took a hit. However, in India, the returns of the benchmark index BSE Sensex were –23.98% while Japan’s Nikkei were –11.63% and US’s Dow Jones Industrial Average were –15.72%. This goes to show that even during times of a global crisis and market correction, your portfolio is better positioned when you invest across geographies.
- Access to high-performing sectors
Since the economies of different countries are at different stages and are marked by different strengths and weaknesses, industry sectors too function differently in each country. For instance, the biggest tech companies currently are all concentrated in the US. FAANG stocks – Meta, Amazon, Apple, Netflix, and Alphabet – that have had some of the greatest capital appreciation over the last decade are all US-based. Hence, to benefit from specific sector booms in countries around the world, having foreign portfolio investments is helpful.
Risks of foreign portfolio investments
- Political and economic instability
One of the biggest risks that foreign portfolio investors face is political turmoil, jurisdictional risk, and economic instability. For instance, investors who had invested in Russia are facing great challenges since Russia’s invasion of Ukraine and the West placing sanctions on the country. Hence, such country-specific risks are a factor you should consider before adding international investments to your portfolio.
- Understanding market movements
While different markets not being synced is an advantage that helps hedge risk, it can also be a double-edged sword because it also requires you to understand how different markets work. To benefit from FPIs, you need to understand the market trends and price movements of different countries. This can be tricky and also demand a lot of time and energy. Hence, an efficient way to undertake foreign portfolio investments is to seek the services of an investment planner. By choosing a private banking institution, you can enjoy not only investment advisory and wealth management services but also others such as fund accounting, cash management, and more.
Countries with the most FPI inflows
The US, Mauritius, Singapore, Luxembourg, and the UK are the top five countries with the highest amount of FPI inflows. Japan, Canada, Ireland, and Norway are other popular countries for foreign portfolio investments. As for FPI in India, the most inflows are from the US. Where you choose to make your foreign portfolio investments should depend on your portfolio’s current asset allocation, your financial goals, and your risk profile. You can figure out what the best investment moves for you are by seeking advice from an investment planner.