As a developing economy, the flow of capital is constant for India’s growth. Foreign investments supplement the domestic investments to boost economic development. This is where Foreign Portfolio Investment (FPI) and Foreign Institutional Investment (FII) come into play.
In this blog, we will study the differences between them, as well as their impact on the stock market, and finally compare both with Foreign Direct Investment (FDI).
What is Foreign Portfolio Investment (FPI)?
Foreign Portfolio Investment (FPI) are investments made by individuals, funds, and institutions from outside the country into its financial markets. The forms it usually takes include:
- Equities
- Debts
- Mutual funds
- Exchange-Traded Funds (ETF)
The important characteristic of FPI is passive. The investors do not get involved in the management and decision-making of the companies in which they have invested. It is meant for diversifying portfolios and enhancing returns.
Important Features of FPI:
- Short-term or long term: Based on the market conditions.
- High liquidity: Easy to sell and buy.
- Volatile: Sudden influx and outflow of funds can lead to market fluctuating.
What is Foreign Institutional Investment (FII)?
Foreign Institutional Investment (FII), having been classified as a subset of FPI, basically corresponds to classes of large, professional investors:
- Hedge funds
- Mutual funds
- Pension funds
- Insurance companies
Unlike individual principal investors, FIIs depend more on research and analysis before investing. Generally, the FIIs buy shares in greater numbers, thus influencing stock prices significantly.
Key Features of FII:
- Professional investing: Conducted by the professionals.
- High impact: Able to affect stock prices.
- Active trading: Buy and sell on a regular basis.
FII vs. FPI: Understanding Key difference
| Feature | Foreign Portfolio Investment (FPI) | Foreign Institutional Investment (FII) |
| Investor Type | Individuals and small institutions | Large professional investors |
| Role in Market | Passive | Active |
| Investment Size | Smaller | Larger |
| Market Impact | Less | High |
| Volatility | High | Moderate |
FDI vs. FPI vs. FII: A Comparative Overview
Foreign Direct Investment (FDI) differs from both FPI and FII. Here’s a detailed comparison:
| Feature | Foreign Direct Investment (FDI) | Foreign Portfolio Investment (FPI) | Foreign Institutional Investment (FII) |
| Asset Type | Productive assets (businesses) | Financial assets (stocks, bonds) | Financial assets (stocks, bonds) |
| Tenure | Long-term | Short-term or long-term | Short-term or long-term |
| Liquidity | Low | High | High |
| Control | Active participation | No control | Limited control |
| Risk & Stability | Stable | Volatile | Volatile |
Effects of FPI and FII on the Indian Economy
- Market Growth: Increased investment in the market eventually positively affects stock prices and stock liquidity.
- Economic Volatility: Quick flows and outflows can create extreme instability in a market.
- Capital Flow: It is the capital required for the economy as an external capital bringing in growth.
Conclusion: Which Investment Is More Important?
Though FPI and FII might have similar objectives, their differences lie in the type of investors, influence on the market, and also the method of investing.
- FPI: Passive investment for diversification of portfolios.
- FII: Active investment with considerable impact on the market.
- FDI: Long-term making money for economic growth.
Knowing these facts will thus help both investors and policy-makers understand the difference. Lastly, a judicious combination of FDI, FII, and FPI could create an environment of stable and sustainable investments for the future India.