MBA (General)IV – Semester, International Business Unit III
Definition of Portfolio Investment
Foreign Institutional Investment means investment made by foreign institutions such as pension fund, mutual funds, investment trust, Assets Management companies and other specified institutions, in the securities traded on the domestic primary and secondary market. In the case of India, securities include shares, debentures, warrants other schemes floated by domestic mutual funds and other securities specified by the government of India from time to time.
Portfolio Investment
Foreign
Institutional Investment means investment made by foreign institutions such as pension fund, mutual funds, investment trust, Assets Management companies and other specified institutions, in the
securities traded on the domestic primary and secondary market. In the case of India, securities include shares,
debentures, warrants other schemes floated
by domestic mutual funds and other securities specified by the government of
India from time to time. These are regarded as portfolio
investment from point of view of FIIs since they do not grant them any managerial control.
Although
Government of India treats investments in foreign currency convertible bonds and global depository receipt
underlying by FIIs direct investment, there are portfolio investment from the point of
view of FIIs. These institutions investors make such investment not with a purpose of acquiring any managerial control
over Indian companies
but with the object
of securing portfolio diversification. If investments are made with the object of acquiring managerial control,
they are treated as foreign direct investments. Portfolio Investment, that is investment made in securities of
different companies and in different countries is made to diversify the portfolio of investment to secure higher
returns at the same time minimizing risks.
The investment
made by foreign institutional investors thus becomes portfolio investment. The investors make investment in securities of different
companies in the same country and indifferent countries; they thus diversify their securities portfolio. Investment no doubt brings returns. But there are
risks associated with every investment. Prudent investors know that diversifying their investment across
industries leads to lower level of risk for a given level of expected return. It is a well known
proposition in portfolio theory that whenever there is an imperfect
correlation between return risk is reduced by
maintaining only a portion of wealth in any security when securities/assets
available for investment are
expanding an investors or can achieve a maximum return for given risk or minimum risk for a given expected
portfolio return. The broader the diversification, the more stable the return and the more diffusion of the risks.
The advantages
of diversification of portfolio of domestic securities are limited because all companies in a country are
more or less subject to the same cyclical economic fluctuations. Through international diversification that is, by diversifying investment in securities of companies in different countries, investors can
achieve a better tradeoff between
return and risk. Country risk and foreign exchange risk, like business risk can
be diversifies by holding
securities of different countries denominated in different currencies. The benefit
of international diversification will increase if the securities portfolio covers not only equities but also bonds.
Instead of
buying foreign equities and bonds overseas, investors can buy foreign and bonds in their home market in the form
of American Depository receipt (ADR) and Global
Depository receipt. ADRs are certificate of ownership issued by U.S. bank in
the form of depository receipt
representation one or more underlying foreign shares it holds in custody. ADRs for about 825 companies
from 33 foreign countries are traded currently
on U.S. foreign
companies prefer to raise funds in Euro market through Global Depository Receipt (GDR). The
modus Operendi for the issue of GDRs is already explained in the chapter
on “International Financial Market”.
The easiest way
to investing abroad is to buy shares in an international diversified mutual fund. There are four basic
categories of mutual funds that invest abroad.
Global funds can invest anywhere in the world, including the U.S.
International funds invest only outside the U.S.
Regional funds focus on specific on specific geographical areas overseas, such as Asia or Europe.
A
single country funds invest in individual countries
such as Germany or Taiwan.
