# What Is Foreign Portfolio Investment (FPI)? Benefits and Risks

![Foreign Portfolio Investment (FPI): Securities and other financial assets held by investors in another country.](https://www.investopedia.com/thmb/WOxYGAdKBq1znj42gqdTXAGRClY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/foreign-portfolio-investment-fpi.asp-final-cfb0ab9482a644cdb1164ddedea9dcb6.png)

*— Investopedia / Sydney Saporito*

> **Definition**
>
> Foreign portfolio investment (FPI) involves investors holding financial assets, such as stocks and bonds, in another country to diversify their portfolios. Unlike direct investments, FPIs generally don't confer management control over the assets.

## What Is Foreign Portfolio Investment (FPI)? 

Foreign portfolio investment (FPI) consists of securities and other financial assets held by investors outside of their domestic market. It does not provide the investor with direct ownership of a company's assets and is relatively liquid, depending on the [volatility](https://www.investopedia.com/terms/v/volatility.asp) of the market. Along with [foreign direct investment](https://www.investopedia.com/terms/f/fdi.asp) (FDI), FPI is one of the common ways to invest in an overseas economy. FDI and FPI are both important sources of funding for most economies.

### Key Takeaways

*   FPI holdings can include stocks, ADRs, GDRs, bonds, mutual funds, and exchange-traded funds.
*   Along with foreign direct investment (FDI), FPI is one of the common ways for investors to participate in an overseas economy, especially retail investors.
*   Unlike FDI, FPI consists of passive ownership; investors have no control over ventures or direct ownership of property or a stake in a company.

## How Foreign Portfolio Investment (FPI) Works

[Portfolio investment](https://www.investopedia.com/terms/p/portfolio-investment.asp) involves the making and holding of a hands-off or passive investment of securities, done with the expectation of earning a return.

In foreign portfolio investment, these securities can include stocks, American depositary receipts (ADRs), or global depositary receipts of companies headquartered outside the investor's nation. Holding also includes bonds or other debt issued by these companies or foreign governments, mutual funds, or [exchange-traded funds](https://www.investopedia.com/terms/e/etf.asp) (ETFs) that invest in assets abroad or overseas.

An individual investor interested in opportunities outside their own country is most likely to invest through an FPI. On a more macro level, foreign portfolio investment is part of a country’s capital account and shown on its balance of payments (BOP). The BOP measures the amount of money flowing from one country to another country over one monetary year.

## FPI vs. Foreign Direct Investment (FDI)

With FPI, as with portfolio investment in general, an investor does not actively manage the investments or the companies that issue the investments. They do not have direct control over the assets or the businesses.

In contrast, [foreign direct investment](https://www.investopedia.com/ask/answers/060115/what-difference-between-foreign-portfolio-investment-and-foreign-direct-investment.asp) (FDI) lets an investor purchase a direct business interest in a foreign country. For example, say an investor based in New York City purchases a warehouse in Berlin to lease to a German company that needs space to expand its operations. The investor’s goal is to create a long-term income stream while helping the company increase its profits.

This FDI investor controls their monetary investments and often actively manages the company into which they put money. The investor helps to build the business and waits to see their return on investment (ROI).

> **Fast Fact**
>
> Factors such as economic stability, growth prospects, favorable regulatory environments, and attractive returns draw FPIs into a country.

However, because the investor’s money is tied up in a company, they face less liquidity and more risk when trying to sell this interest. The investor also faces [currency exchange risk](https://www.investopedia.com/articles/forex/021114/exchange-rate-risk-economic-exposure.asp), which may decrease the value of the investment when converted from the country’s currency to the home currency or U.S. dollars. An additional risk is political risk, which may make the foreign economy and its investment shaky.

Although some of these risks affect foreign portfolio investments as well, they do so to a lesser degree than with foreign direct investments. Since the FPI investments are financial assets, not property or a direct stake in a company, they are inherently more marketable.

So FPI is more liquid than FDI and offers the investor a chance for a quicker return on their money, or a quicker exit. However, as with most investments offering a short-term horizon, FPI assets can suffer from volatility. FPI money often departs the country of investment whenever there is uncertainty or negative news in a foreign land, which can further aggravate economic problems there.

Foreign portfolio investments are more suited to the average retail investor, while FDI is more the province of institutional investors, ultra-high-net-worth individuals, and companies. However, these large investors may also use foreign portfolio investments.

### FPI Pros and Cons

Pros

*   Feasible for retail investors
    
*   Quicker return on investment
    
*   Highly liquid
    

Cons

*   No direct control/management of investments
    
*   Volatile
    
*   Cause of economic disruption (if withdrawn)
    

## Example of FPI

India has continued to attract significant foreign portfolio investments (FPIs). By mid-2025, according to the Securities and Exchange Board of India (SEBI), the number of registered FPIs is almost 12,000.

This continuous increase reflects investors' confidence in India's growth prospects, driven by robust economic reforms and the government's proactive policies aimed at improving the ease of doing business.  

A major example of FPI can also be seen in Brazil, which has also experienced a surge in foreign portfolio investments. Brazil has seen a remarkable influx of FPIs, with foreign investors significantly increasing their holdings in Brazilian equities.

Factors contributing to this trend include favorable regulatory changes, a more stable macroeconomic environment, and potentially attractive returns offered by the Brazilian stock market.

## How Will I Use This in Real Life?

If you're looking to diversify your portfolio, foreign portfolio investment can be a good way to start. It offers different investment opportunities, varied growth potential, and a [hedge](https://www.investopedia.com/terms/h/hedge.asp) against domestic markets.

FPI allows you to gain exposure to other economies, like India, Brazil, or Japan, often through your regular brokerage account, without having to deal with foreign securities laws or too much paperwork.

Investing abroad is generally a fairly straightforward process, as you can invest in foreign stocks, bonds, or ETFs from your regular brokerage account, though some specific stocks might require more steps.

For passive investors looking to gain exposure to global trends, for example, if you think Asian markets are about to boom, FPI can be a simple and efficient way to test your market predictions.

It's worth noting that foreign markets come with all the same risks that domestic markets do, such as currency fluctuations and political changes, so always proceed with caution and balance your portfolio.  

## What Are the Risks Associated With FPI?

Risks include currency fluctuations, political instability, different regulatory environments, and economic volatility in the foreign market.

## Can Retail Investors Participate in FPI?

Yes, retail investors can easily participate in FPI, often through mutual funds, ETFs, and other investment vehicles that provide exposure to foreign markets.

## How Do Investors Manage the Risks of FPI?

Investors can manage risks by broadly and effectively diversifying their investments across multiple countries and asset classes, and by staying informed about global economic and political developments.

## The Bottom Line

Foreign portfolio investment (FPI) is crucial for global [diversification](https://www.investopedia.com/investing/importance-diversification/) and provides investors access to international markets, enhancing their potential for higher returns. By holding assets such as stocks, bonds, and mutual funds from foreign countries, investors can spread risk and tap into diverse economic growth opportunities worldwide.

> **Article Sources**
>
> 1.  SEBI. "[FPIs/Deemed FPIs (Erstwhile FIIs/QFIs)](https://www.sebi.gov.in/sebiweb/other/OtherAction.do?doRecognisedFpi=yes&intmId=29)."