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What is portfolio investment?

Portfolio investment definition

According to portfolio investment definition, it is a passive or a hands-off investment. With portfolio investment, an investor buys assets with the sole purpose of financial gain, without any involvement in the company’s internal decision making.

Portfolio investment meaning presupposes that the investor does not actively participate in the management of the company. Foreign portfolio investment is when an investor buys assets in a foreign company.

Where have you heard about portfolio investment?

You may have heard about foreign portfolio investments in particular in economics. This is when an investor deposits their money in a foreign country’s bank or buys stocks in another country’s market. This is an example of a “portfolio flow.”

What you need to know about portfolio investment...

Portfolio investments can be made into all types of assets, including stocks, government bonds, real estate investment trusts and exchange-traded funds. This type of investment contrasts with direct investment — that is when an investor buys stock with the aim of gaining voting power in the company.

By not getting involved with the company’s management, portfolio investments don’t require as much attention as direct investments and can provide a steady rate of return, although they are still associated with risk.

The composition of an investment portfolio is affected by a number of factors. The most important are the invested amount, investor’s risk tolerance and planning horizon. 

Depending on various individual characteristics and circumstances, investors may choose different types of investments. Investors with aggressive risk tolerance may be interested in small-cap stocks, international securities, real estate and commodities, while investors with moderate or low risk tolerance could prefer government bonds and blue-chip stocks. 

An investor’s personal goals and available time could also be a factor.

For example, a young investor who wants to save money for their retirement and has 30 years ahead of them may feel uncomfortable with high-risk assets like individual stocks. Meanwhile, a more risk-tolerant but much older investor may prefer riskier assets, which may bring high profits faster, as they have almost no time before retirement.

Foreign portfolio investment, or FPI, includes securities or other financial assets held in another country. Together with foreign direct investment, FPI is a popular type on investment in a foreign economy. If an investor is interested in investment opportunities outside of their home country, foreign portfolio investment can be a good starting option. 

Some benefits of foreign portfolio investment include:

  • Diversification of portfolio. FPI represents a clear and simple way to diversify a portfolio on an international level.

  • International credit. Foreign portfolio investments provide investors with a larger credit base in foreign countries.

  • Exchange rate benefits. Having foreign portfolio investments in a country with a stronger currency may bring benefits to an investor due to a difference in the exchange rates.

  • Access to larger markets. Foreign portfolio investments provide access to larger and less competitive markets.

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