Difference between FDI and FPI

FDI and FPI are two primary forms of foreign investments that play a major role in shaping India’s economy. While Foreign Direct Investment (FDI) involves long-term ownership and control, Foreign Portfolio Investment (FPI) focuses on short-term financial gains through securities. This article explains what FDI and FPI are, their key features, and how they differ in purpose, risk, control, and impact.

Capital is inevitable for the economic growth of any country.  A country can’t raise funds single-handedly from its internal resources. So, Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are two prevalent approaches allowing foreign investors to invest in a country’s economy. Both of them focus on the acquisition of a stake in an initiative established in another country. Let’s first understand what is FDI and FPI and then go through their differences. 

Significance of FDI

FDI refers to an investment made to obtain an ownership stake in an enterprise by an enterprise situated in another country. The investment leads to the transfer of resources, funds, strategies, etc. Various ways of making FDI involve establishing a subsidiary company, creating a joint venture or via merger and acquisition. In FDI, the investor company has significant control over the investee company.

Key Features of FDI

After understanding what FDI is, let’s look at its key features:

• Focus on Long-term Investment: Long-term investment is the key focus of FDI. Investors intend to establish a lasting presence in the foreign market.
• Buying or Starting Businesses: It involves obtaining equity ownership in a foreign enterprise. It can be setting up new business operations or acquiring an existing company.
• Comes with Risk and Reward: It involves risks, including exposure to the political and economic conditions of the host country. However, it also has the potential for higher returns for long-term investment.
• Growing Interest in Emerging Markets: The trends in Foreign Direct Investment denote increasing flows toward emerging markets. Policy changes and infrastructure growth drive these trends. 

Significance of FPI

FPI refers to foreign investors' investments in the financial assets of an enterprise. The intention is to obtain short-term financial gain. It doesn’t lay significant control on an enterprise’s managerial operations.

The investments are made in a company’s securities, such as bonds, stocks, mutual funds, etc. Those assets are traded in financial markets. The foreign investors deposit money in the host country’s bank account; subsequently, they buy securities.

Passive ownership ensures investors have no control over property, ventures, or direct stakes in companies.

The following regulatory framework governs FPIs in India:

• The Foreign Exchange Management Act, 1999
• SEBI’s regulations on foreign institutional investors (FIIs) 

Key Features of FPI

• Short to Medium-Term Investment: The investment horizon ranges from short to medium-term. Usually, investors purchase and sell financial assets based on the economic trends or market conditions.
• No Control in the Company: It doesn’t involve acquiring a considerable stake in a foreign company. Investors do not focus on the managerial decisions of the companies they invest in.
• Helps Spread Risk: Investors use FPIs to diversify their investment portfolios across various asset classes and countries. So, it helps them spread risk and increase returns.
• Focus on Earning Returns: Its key objective is to generate financial returns with the help of interest, capital appreciation, dividends, or other income sources linked with financial assets being held. If you are looking for short-term investment options, you can invest in a fixed deposit (FD) to earn a fixed interest rate.

Key Differences: FDI Vs. FPI

Each point in the table below clarifies the difference between FDI and FPI.

Which One Should You Choose Between FDI and FPI?

Your risk tolerance and financial goals assist you in choosing between FDI and FPI. FDI considers long-term investments, allowing investors to control foreign businesses significantly. It leads to deeper economic involvement. It excels in terms of long-term returns and stability. Contrastingly, FPI is more focused on short-term investments in bonds and stocks. It does offer quick exit options and liquidity, but at the cost of high market volatility. You can go for FDI to benefit from sustained growth and strategic control. FPI can be suitable if you prefer quick financial gains and flexibility.

Plan Your Finance Wisely Today

Bringing foreign capital into the domestic economy is possible with the help of FDI and FPI. FDI indicates a more considerable and stable investment and comes with a higher level of control. FPI focuses on shorter-term investments in financial assets; it doesn’t seek major influence over the companies invested in. These approaches play key roles in the global economy and streamlining international capital flows. Understanding the FDI and FPI difference discussed above simplifies your choice.