5 Major Differences Between FDI And FPI

Difference Between FDI And FPI

Both FDI and FPI are familiar terms for an economy that every investor should know. The two seem to be very similar, but there are several fundamental differences between the two.

Here in this article, we will discuss these differences in a comprehensive manner try to cover all the possible aspects and consequences of these two.

What Is Foreign Direct Investment (FDI)

Foreign direct investment or FDI is a form of investment when a company or individual acquires a controlling stake in a business entity which is situated in a different country.

In the case of FDI, the owners are directly involved in daily operations and management with the invested company. Usually, FDI investments are made when an investor establishes foreign business operations or buy foreign business assets and establishes ownership in a foreign corporation.

There are many ways of making FDI:

  • By merger and acquisition of a corporation
  • creating a joint venture
  • By establishing a subsidiary company.

What Is Foreign Portfolio Investment (FPI)

You may have heard of this term called FPI in some news of business paper. So, what FPI is? FPI or Foreign portfolio investment a form of investment on which an investor holds assets and securities outside their country.

These investments are consist of stocks, bonds, exchange traded funds (ETFs) or mutual funds, etc. It is a way in which an investor can invest in a foreign economy.

There are many ways of making FDI:

  • Buying stocks in another country.
  • Buying depository receipts in your own country
  • Investing in Bonds or other financial schemes

Difference Between FDI And FPI

While FDI and FPI seem to be similar because they both contain foreign investments, Yet there are many fundamental differences between the two.

FDI (Foreign Direct Investment)

FPI (Foreign Portfolio Investment)

FDI is done when investors are willing to invest for a longer term. Since, they are buying controlling stake in and establishing relations with the management they have to plan for a long run

FPI investors can reverse their investment decision within a few minutes. Their horizon of investment can be very low.

Generally FDI investments are larger in amount and illiquid. They are more complex in nature comparing to FPIs

FPI investments are smaller and very liquid. Investors can trade them within a few minutes.

FDI investments are made to acquire or buy a controlling stake in the company and actively participate in their daily operations and management

FPI investors are small investors and invest passively. They are neither associated with the management nor possesses controlling stake in the corporation

FDI investors invest in physical assets of the foreign company

FPI investors invest in foreign financial assets like Bonds, Stocks, Securities etc.

FDI is a stable investment

FPI is highly volatile

Also Read: What Are The Powers And Functions Of SEBI?

Conclusion

FDI and FPI are the two methods by which foreign capital can be brought into the domestic economy. But it is easier for small investors to make foreign portfolio investments or FPIs.

Such an investment has both positive and negative aspects, as the inflow of funds improves the position of balance of payment while the outflow of funds in the form of dividends, royalty, import, etc. will result in the reduction of the balance of payment.

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He is pursuing BBA, a Passionate trader and his hobby is to write content on business and finance.

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