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What Is the Difference Between FDI and FPI

25 Sep 2023

Difference Between FDI and FPI

The Indian stock market, with its dynamism and potential for growth, has attracted investors from around the world. Among these investors, two major categories dominate the scene: Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). But what sets them apart, and how do they impact India's economic landscape? Let's delve into the differences between these two key investment vehicles.

What is FDI?

Foreign Direct Investment, or FDI, refers to an investment made by a foreign entity or individual in a company or business in India. The defining feature of FDI is the acquisition of substantial ownership, typically exceeding 10%, which grants the foreign investor significant control and influence over the Indian enterprise.

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What is FPI?

Foreign Portfolio Investment, on the other hand, involves investing in Indian financial assets, such as stocks, bonds, and other securities, without acquiring significant ownership or control over the companies issuing these assets. FPI is more akin to an indirect investment approach.

What are the Objectives of investment in FDI and FPI?

FDI: FDI aims to establish a long-term interest in an Indian enterprise. Foreign investors opt for FDI when they believe in the company's growth potential. They want to participate in its management and decision-making.

FPI: FPI is driven by the objective of portfolio diversification and short-to-medium-term returns. Investors often choose FPI to gain exposure to the Indian market without the commitment and responsibilities associated with FDI.

What are the Regulatory Frameworks of FDI and FPI?

FDI: India's FDI policies are more regulated and restrictive compared to FPI. Government approvals and compliance with sector-specific guidelines are important for FDI.

FPI: FPI offers more flexibility to investors. The regulatory framework for FPI is often more accommodating in terms of entry and exit.

What Are the Risk and Return Profiles of FDI and FPI?

FDI: FDI carries a higher level of commitment and risk due to its long-term nature. Returns are often realised over a more extended period.

FPI: FPI is typically associated with shorter investment horizons, making it more liquid. However, it can be subject to market volatility.

What is The Impact of FDI and FPI on the Indian Economy?

FDI: FDI contributes to economic growth by bringing in foreign capital and expertise. It can also create jobs and improve infrastructure.

FPI: FPI infuses liquidity into the stock market. However, it can lead to market volatility, as foreign investors can quickly move their investments in and out of the market.

The Final Word

Both FDI and FPI play pivotal roles in the Indian stock market and the economy. While FDI promotes long-term growth and development, FPI adds liquidity and dynamism to the financial markets. Investors must consider their objectives and risk tolerance before choosing FDI or FPI.

 

Related Articles: Is Arbitrage Legal: Understanding the Basics | What is Cross Trade | What are the Types of FDI

 

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