Being a developing nation, India’s total capital requirements can’t be met with its internal resources alone. Hence, its foreign investments become a crucial part when it comes to supplying capital to the country. Both foreign and domestic investments can drive the Indian stock market. They are impacted by the political and economic status of the nation. The two most popular ways of supplying capital to the country are foreign direct investments (FDI) and foreign portfolio investments (FPI). Here is the difference between FDI and FII and FPI.

What is FDI vs FII vs FPI?

Since retail investors have started investing in the different types of foreign investments, they should be clearly aware of the subtle difference between FDI and FII and FPI.

– FDI implies that foreign investors are directly investing in the productive assets of another nation. 

– On the other hand, there is no difference between FPI and FII. Foreign institutional investors (FII) are a single investor of a group of investors that brings in foreign portfolio investments. Hence, they  are one in the same. They involve investing in financial assets like the bonds and stocks of another country. 

While there are commonalities between FDI vs portfolio investments from institutions, they are different in many ways. Nations with a higher level of FPI can easily encounter higher market volatility and turmoil with respect to currency during uncertain times. They are insurance companies, hedge funds, mutual funds, and pension funds internationally that invest in Indian equities. They partake in the secondary market of India’s economy. To participate in India’s market, FIIs must get themselves vetted and accredited by SEBI, the Securities and Exchange Board of India.

Features of FDI vs FII vs FPI 

Here is a set of differences between foreign direct investments and foreign institutional investments. 

1. Type of Asset 

FDIs tend to invest in productive assets like machinery and plants for their business. The value of these assets increases with time. Foreign institutional investments put their money into financial assets like the bonds, mutual funds, and stocks of the nation. The value of these financial assets may increase, or decrease with time depending upon the company in charge, economic, and political consensus. 

2. Investment Tenure for FDI vs FII vs FPI 

Foreign director investors tend to take a longer-term approach to their FDI investments. It can take anywhere between 6 months to a couple of years to advance from the planning stage to the project implementation stage. The difference with respect to foreign portfolio investments of FIIs is that the investors for these types of foreign investments have a much shorter investment horizon. FIIs may be invested for the long haul however, the investment horizon continues to remain small, especially when one’s local economy is turbulent. Thos second point of difference between FDI and FII and FPI is closely tied to the third difference of liquidity. 

3. Liquidity of FDI vs FII vs FPI Investments

Due to the length of the investment horizon, FDI investors also cannot depart as easily from their investments as FII portfolio investments. FDI assets can even be considered larger and definitely less liquid than FII portfolio investments. Lack of liquidity reduces the buying power of an investor and increases the risk. This is why investors prepare for long periods before investing in FDI assets. 

FII portfolio investments are both widely traded and highly liquid. An FPI investor has the luxury of exiting their investment with a few clicks of their mouse. Hence, these types of investments do not require as much planning and may also be considered more volatile due to being highly liquid. The liquidity of an asset is a factor of how widely traded it is and also how volatile it is. FDI can prove to be a more stable investment than FPI especially for a nation to attract foreign investment.

4. Control Exercised in FDI vs FII vs FPI

Investors who look into FDI can usually exercise a higher degree of control than those who invest in FIIs. In general, FDI investors are actively involved in the management of their investments. FDI investors take controlling positions in two ways: either through joint ventures or in domestic firms. FII investors tend to take on more passive positions in their investments. FIIs are considered passive investors and aren’t involved in the day-to-day functioning and operation as well as strategic planning required by any domestic companies.