2.
Explanation
Foreign Portfolio Investment (FPI) refers to the investment in financial assets, such as stocks and bonds, in foreign countries by individuals, institutions, or entities.
1. Financial Assets: FPI involves the purchase of financial assets in foreign countries, rather than acquiring ownership or control of physical assets or companies. These financial assets can include stocks, bonds, mutual funds, and other securities.
2. Portfolio Diversification: Investors engage in FPI to diversify their investment portfolios geographically. By investing in foreign markets, they spread risk and reduce the impact of adverse events in their home country’s markets.
3. Liquidity and Accessibility: FPI provides investors with access to a wide range of international investment opportunities. It allows them to buy and sell foreign financial assets more easily compared to directly investing in foreign companies or assets.
4. Indirect Ownership: FPI does not grant investors direct ownership or control over the companies whose securities they hold. Instead, they have an indirect stake in these companies through their holdings of stocks or bonds.
5. Currency Exchange Risk: FPI also introduces currency exchange risk because investors must convert their home currency into the currency of the foreign investment. Fluctuations in exchange rates can impact the returns on these investments.
6. Regulatory Compliance: Foreign portfolio investors are often subject to the regulatory and tax requirements of both their home country and the foreign country where they invest.
FPI can be a way for investors to seek higher returns, access markets with growth potential, or take advantage of specific investment opportunities in foreign markets. It is an integral part of global finance and contributes to the flow of capital across borders.