Foreign Direct Investment vs Foreign Portfolio Investment

Capital is essential for economic growth. Foreign investors are a good option as most countries cannot afford to meet all their capital needs through their own resources. Two options are available to foreign investors who want to invest in the foreign economy: foreign direct investments (FDI) or foreign portfolio investment (FPI). These are the most popular ways that investors can invest in international portfolios There are many differences between FDI and portfolio investments in foreign assets when it comes to the implications of FDI. These differences can be clarified by clarifying FDI vs. FPI.

Foreign investors directly invest in the productive assets of another country through FDI. FPI, on the other hand means investing in financial assets such as stocks and bonds of another country. There are many differences between portfolio investments and FDI. Retail investors have begun investing in these foreign investments. They should be aware of the differences between FPI and FDI. Higher levels of FPI may experience greater market volatility and turmoil in relation to currency during uncertain times.

Difference Between FDI and FPI

FPI and FDI both are foreign investments at heart. However, there are important differences that must be considered before you invest.

1. FPI vs FDI: What is the Control?

The main difference between the two is how much control the foreign investor has. Investors who are interested in FDI have a greater degree of control than investors who invest in FPI. Investors in FDI can take control in one of two ways. They may do so through joint ventures, or by owning domestic businesses. FDI investors generally actively participate in the management and operation of their investments.

FPI investors, on the other hand are less involved. FPI investors tend to be more passive in their investments. Passive investors are those who aren't involved in day-to-day operations and strategic planning. A foreign portfolio investment can lend passive shares to an investor even if they have a controlling interest. The degree of control is what makes FDI and portfolio investments different.

2. Investment Horizon of FDI vs FPI

A key difference is that foreign direct investment tends to be more long-term. From the planning stage to project implementation, it can take 6 months to several years. Foreign portfolio investments are different because investors have a shorter investment horizon. Although they may be investing for the long-term, their investment horizons are still very small, especially if the local economy is in turmoil. The third distinction is closely linked to the second point of differentiation between FPI and FDI.

3. Liquidity of FDI vs FPI Investments

FDI investments have a longer time horizon because investors don't usually liquidate their assets or leave the country. FPI assets are more liquid and can be larger than FDI assets. Insufficient liquidity can reduce an investor's buying power and increase the risk. Investors should plan well before investing in these types illiquid assets. FPI assets can be traded widely and are highly liquid. FPI investors have the option to exit their investments with just a few mouse clicks. These investments require less time and are more volatile due to their high liquidity.

4. Volatility of FDI vs FPI Investments

Liquidity is determined by how traded an asset is, and how volatile it can be. FPI can be more volatile than FDI, particularly if a country is trying to attract foreign investment. Foreign direct investments are more risky because they require a longer investment time. Investors are somewhat locked in their investments for the long-term due to the absence of liquidity.FPI can be traded quickly and may become volatile as traders constantly enter and exit their positions.