What is a foreign portfolio investment?
A foreign portfolio investment is a type of investment that is in a portfolio abroad. This particular type of investment can include a host of varying assets that are held by the investor in foreign countries. Foreign portfolio investments include all kinds of asset classes including stocks, bonds, and cash equivalents. Such investments can either be directly held by the investor or managed by finance professionals. However, what is typical is that foreign portfolio investments are held passively by an investor. Although their liquidity is dependent upon the volatility of the foreign market within which they are currently held, these investments can also prove to be highly liquid.
While there are both advantages and disadvantages of foreign portfolio investment, in this article we will be covering the benefits solely. There are a host of benefits of foreign portfolio investments. The most obvious advantage they offer is the diversification of an investor’s holdings. International diversification is a great way to stabilize one’s portfolio’s returns during economic ups and downs. Here are some more foreign portfolio investment advantages in more detail.
Portfolio Diversification
Firstly, as mentioned briefly, the benefits of foreign portfolio investment primarily include its ability to improve the diversification of an investor’s portfolio’s assets. This in turn helps the investor when it comes to their risk-adjusted returns. The global stock market is incredibly complex. It operates in a way such that the factors that drive the downfall or underperformance of one country’s stock market will differ significantly from the factors that affect another country’s market. Hence, diversification shows its true advantage in these situations wherein, an investor with stocks in a variety of countries is likely to experience less volatility over their entire portfolio.
Exchange Rate Benefit
The exchange rates of international currencies keep changing. Although there are general trends, some currencies can experience a meteoric rise or fall. In certain cases the currency of an investor’s home country is strong, and in other situations it is weak. With strategic investments in foreign portfolios, an investor is helping their chances at benefiting from a strong currency. While many factors and adequate strategizing affect how advantageous this strategy can be, it can certainly be used in an investor’s favor.
Access to Larger Markets
One might see that home markets have grown incredibly competitive as many businesses offer similar services. One might find the market saturated if well explored already, and at certain times of the year investing might not prove lucrative. One of the benefits of foreign portfolio investments is that foreign markets can prove less competitive than one’s home market. Hence, due to the lack of competition, an investor can have access to a larger market. By tapping into a market that is less saturated, there is a broader scope of success.
International Credit
Another important point under foreign portfolio investment advantages is that those who have invested in foreign portfolios broaden their credit base. An investor with foreign portfolios has now got access to credit in foreign countries where the investor could have significant investments. By broadening one’s credit base, an investor is securing their line of credit and continuous and steady even during trying times. When the credit scores available at home are either inexpensive or unfavorable for any number of factors, having international credit serves advantageous. For businesses, the ability to secure credit favorably and as fast as they can make the difference to whether they execute a project or not.
Liquidity
Liquidity is not guaranteed but foreign portfolio investments tend to be highly liquid. In cases where these foreign portfolio investments are highly liquid in nature, an investor can both buy them and sell them easily as well as quickly. These foreign portfolio investment advantages allow for higher buying power in the hands of investors. Higher buying power than results in a steady stream of cash coming in. This is because those with higher buying power are better poised to quickly respond to potentially lucrative purchase opportunities. Ultimately, having flexibility in buying power is advantageous when you want to move your holdings around so that they give you the best returns. Foreign portfolio investments can give an investor the required liquidity.
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