Foreign portfolio investment, or FPI, is any financial asset that you hold from outside of your country. For example, if an American investor buys shares on the London Stock Exchange, they hold a foreign portfolio investment. This can refer to any form of financial product, such as stocks, bonds, funds or currencies. Foreign portfolio investment does not refer to ownership of non-securitized assets. So, for example, it does not refer to buying real estate in a foreign country or directly buying a portion of a business.
Want help investing outside of the United States? Consider working with a financial advisor.
If a company has issued shares and you purchase them, then you have bought securities and now hold a foreign portfolio investment. If a company has not issued shares, but instead you just buy a portion of the business directly, then you do not hold a foreign portfolio investment because you did not buy any securitized assets.
Who Buys FPIs?
Anyone can invest in foreign portfolio investments.
Historically this is a market which has been limited to professional investors, because they’re the only ones who had practical access to global markets. Retail investors, working through newspapers and stock brokers, had little exposure to this market. Even if they could access foreign assets it would typically have been prohibitively expensive.
The advent of online trading has changed all that. Today, most major trading platforms offer at least some access to global markets. It isn’t hard for an American investor to buy stocks from Europe and Asia, and vice versa.
The upshot is that foreign portfolio investments have become increasingly commonplace for individual investors as well as the companies and professionals who have historically made up most of this market.
What Are the Benefits of FPIs?
The main benefit of foreign portfolio investments is diversity. The important thing to remember is that FPIs are not a single asset class. This is a catch-all term which refers to any financial product sold from outside of your country. If you are a trader in the United States, the term “foreign portfolio investment” refers equally to shares in a Parisian tech startup and Brazilian sovereign debt.
By investing in global markets, you can access the performance of different business environments. This brings entirely different risks and rewards. Not only that, but you can shift your money into multiple different economies. When your money is spread across multiple nations you are at much less risk from a single economic downturn. You can also create more opportunities to capitalize on any given economy’s success.
You also get side-access to global currency markets. By holding foreign securities assets, you functionally hold assets that are priced (and therefore can be sold) in a foreign currency. If, for example, you buy European bonds, then you effectively have access to a pool of euros based on the coupon payments and sale price for those bonds. All of this provides a new set of opportunities and hedges compared with keeping your money entirely local.
What Are the Risks of FPIs?
The risks of FPIs are the same as the benefits. By increasing the diversity of your portfolio, you also increase its exposure to potential risks.
As with all securities, the risk/reward profile of each investment is based on the asset class and the individual product. This risk is doubled with foreign portfolio investments, since you also need to evaluate risk and reward based on your investment’s nation of origin. Sovereign debt, for example, might be an excellent investment or it might be a relatively high-risk choice depending entirely on the nation issuing the bonds. Shares of stock might be a well-known asset, or they might be subject to the whims of local government.
These risks have to be evaluated on a case-by-case basis.
This is particularly true when it comes to legal and jurisdictional issues. Most investors have an intuitive sense of how their own economy works, what formal and informal rules it obeys. This is not the case once you begin investing across borders. It’s harder for you to understand the rules of another country’s system, so there’s a much greater chance that you’ll be taken by surprise when a legal or political issue interferes with your investment.
You need to be careful of domestic legal issues as well. Investing globally can raise a host of potentially complicated issues when you try to bring your money back home. This can include tax complications, disclosure forms and even anti-money laundering laws. At worst, you can inadvertently invest in a product or asset that violates a domestic law, in which case you might be forced to divest all of your gains.
This last is a very low risk unless you are looking for exotic products. So long as you invest through mainstream brokerages you are generally quite well protected from assets that raise issues of legality. However if you make significant foreign investments, you should at least consult a tax professional.
The Bottom Line
Foreign portfolio assets is a term that refers to any financial product from outside of your home country. These can be an excellent way to diversify your portfolio and gain exposure to foreign currencies, just be sure you understand the economy in which you’re investing first.
- If you’re interested in this form of diversification, the next step is to start looking for a market. Read on to see how you can start investing in international markets.
- Investing is hard no matter what country you’re working in, and a financial professional can help you make the best decisions for you. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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