If you have perused through books on stock market investment, you must have come across the terms FDI and FPI. While FDI and FPI are avenues of foreign capital investment in different host countries, both differ in terms of nature of investment, purpose, and time horizon. FDI involves substantial long-term commitments and establishing ownership and control in the foreign enterprise. FPI, on the other hand, focuses on acquiring foreign financial assets listed on exchanges for short- to medium-term returns. We assess the differences between FDI and FPI in detail in the following sections.
Also read: Invest in US stocks from India
Foreign Direct Investment (FDI)
Foreign direct investment is an investment made by an individual or company in one country into business interests located in another country. For instance, building warehouses, establishing manufacturing businesses, or acquiring a significant ownership stake in a foreign enterprise qualify as FDIs. In other words, FDI establishes a direct business interest in a foreign country.
FDI involves a long-term commitment, with investors establishing a lasting presence in the foreign market and its economy. FDI also requires a substantially higher amount of investment and is generally undertaken by venture capital firms, MNCs, and large institutions instead of retail investors. These players can make foreign direct investments in the following ways:
- Establish a joint venture
- Opt for merger and acquisition
- Create a subsidiary company
FDI often involves transferring technology, resources, expertise, and strategies from the investing country to the host country. These transfers can help contribute to the growth and development of the host country’s economy.
Latest FDI trends in India
Foreign direct investment in India has grown in recent years, owing to reformed policy measures like the single-window clearance process and GST implementation. The Indian government has relaxed FDI rules in various sectors, including PSUs and the defence sector. Similar reforms and relaxations have occurred in the telecom sector, oil refineries sector, and power and stock exchanges. According to the United Nations Conference on Trade and Development (UNCTAD) World Investment Report (2023), India secured the 3rd highest FDI for new greenfield projects in 2022. India also recorded the highest-ever FDI inflows of $70.97 billion during FY2022-23. Service, computer software and hardware, trading, telecommunications, and automobile sectors were the top 5 sectors to receive the highest FDI equity inflows during FY2022-23.
Foreign Portfolio Investment (FPI)
Understanding the meaning of FPI is next on the FDI vs. FPI comparison. FPI, or foreign portfolio investment, refers to investing in the financial assets of a foreign company. In simple terms, it means investing in securities like stocks and bonds that are listed on an exchange. FPI is undertaken by retail, institutional, and anchor investors who wish to diversify their portfolios and generate quick returns from the stock market of a foreign country. Unlike FDI, where investors seek to establish influence and control in the business, FPI works on a passive investment approach, where investors are more focused on financial gains rather than establishing control.
In a head-to-head FDI vs. FPI comparison, the benefits of FDI outweigh those of FPI for the host nation. FPIs are less favourable for the host country since these positions can be easily liquidated, and investors can exit the market with their short-term gains. FDI, on the other hand, offers long-term security, usually accompanied by knowledge, technology, and skill transfers.
Latest FPI trends in India
India registered an FPI inflow of $28.7 billion in 2023, registering the highest inflows since 2017. However, the latest trend suggests that FPIs have turned to aggressive sellers, lowering their buying momentum since the beginning of FY24-25. The 2024 general election has impacted investor sentiments, resulting in Rs. 28,242 crore of equity selling and a total outflow of Rs. 27,082 crore (as of 17th May 2024). Delays in interest rate cuts, inflationary pressures, and moderation in corporate earnings suggest FPIs will likely remain sellers in the upcoming months.
Difference between FDI and FPI
In the FDI vs. FPI debate, it is clear that both refer to investing a foreign country. However, both these investment avenues differ greatly. The following table sums up the differences between FPI and FDI to help you make an informed investment choice:
Parameter |
FDI |
FPI |
Nature of investment |
Direct investment and business ownership in a foreign country. |
Indirect investment in the financial assets like stocks and bonds of a foreign country. |
Investor role |
Active role |
Passive role |
Control and influence |
FDI investors command a high degree of control over the management and business operations. |
FPI investors do not exercise a high degree of control on the day-to-day operations of the company. |
Asset type |
Physical assets of the foreign company. |
Financial assets like stocks, bonds, and ETFs. |
Investment approach and time frame |
A long-term approach is needed since it can take years before the project progresses from the planning to implementation stage. |
FPIs have a shorter term than FDIs. |
Motive |
Securing market access or strategic interests in a foreign country for long-term gains. |
Short-term returns and market-linked gains. |
Risk factor |
Generally considered more stable. Risks include the host country’s monetary and fiscal policies, political environment, and regulatory norms. |
Generally considered more volatile due to fluctuations in asset prices. |
Entry and exit |
Entry and exit are difficult. |
Entry and exit are easy since financial assets are highly liquid and widely traded. |
Conclusion
Both FDI and FPI are efficient ways of investing in foreign countries. While FDI is the more direct route involving long-term investment and control over enterprises, FPI is the passive short-term investment route with limited influence on the enterprises invested in. Understanding the FDI vs. FPI comparison can help investors decide their investment approaches. Since FDI requires substantial investments, it is better suited to MNCs and conglomerates. Retail investors with a knowledge of how to invest in the stock market can leverage FPI investments to diversify and grow their portfolios.
