Both Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) deal with investments held by investors in foreign countries and a good method to have international portfolios, they are different from each other. FDI is an investment which is done by an organization or individual situated in another country directly in the productive assets of another country. On the other hand, FPI is an investment which is done by an organization or individual situated in another country's financial assets and instruments such as securities, bonds, etc. of another country.
E.g. If an investor from another country purchases a company relating to the textile industry in another country it shall be considered as Foreign Direct Investment. On the other hand, if an investor buys many shares of a company relating to the textile industry in another country, it shall be considered as Foreign Portfolio Investment.
The difference between the two can be broadly drawn on the basis of-
Control-
FDI- A Foreign Direct Investor will possess a higher degree of control as they are actively involved in the management of the investment as they own the entire/partial productive asset itself.
FPI- A Foreign Portfolio Investor will not have a high degree of control as they are not as involved in managing the investment itself. They have a passive nature rather than active and thereby not involved in day-to-day management.
Duration of Investment-
FDI- The duration in case of a direct investment in the long-term when compared to portfolio investment as it is a purchase of a whole asset rather than just a share of it.
FPI- The duration in case of a portfolio investment can be short-term as well depending on the performance of the financial asset.
Liquidity-
FDI- Since these are long-term investments, the liquidity of assets is less when compared to FPI. These are generally huge investments and not frequently departed from.
FPI- FPI is widely traded across, which is why they are highly liquid. The investors can easily exit and enter due to this. However, these investments are also more volatile due to high liquidity.
Volatile Nature-
FDI- Liquidity is very proportional to volatility. Since FDI’s are more stable investments, they are less liquid and larger investments, hence they are less volatile.
FPI-These are highly traded and hence are more liquid. Since the liquidity is large, they tend to be more volatile.
Also read- In conversation with Managing Partner Gajendra Maheshwari, Reina Legal Advocates
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