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Which type of foreign investment is considered as unsafe?
- a)Foreign Direct Investment (FDI)
- b)Portfolio investment
- c)NRI deposits
- d)External commercial borrowing
Correct answer is option 'B'. Can you explain this answer?
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Which type of foreign investment is considered as unsafe?a)Foreign Dir...
A portfolio investment is an investment made by an investor who is not involved in the management of a company. This is in contrast to direct investment, which allows an investor to exercise a certain degree of managerial control over a company.
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Which type of foreign investment is considered as unsafe?a)Foreign Dir...
Understanding the Risks of Portfolio Investment
Portfolio investment is often considered unsafe compared to other types of foreign investments. Here’s why:
Market Volatility
- Portfolio investments primarily involve purchasing stocks, bonds, or other securities, which are subject to market fluctuations.
- Investors can face significant losses if the market experiences a downturn, making it riskier compared to more stable investments like Foreign Direct Investment (FDI).
Lack of Control
- Investors in portfolio investments typically have no control over the companies they invest in.
- This lack of influence can lead to unfavorable outcomes without any recourse for the investor.
Short-Term Focus
- Portfolio investments often emphasize short-term gains, which can lead to hasty decisions based on market trends rather than long-term value.
- This focus increases the risk of losses during market corrections.
Economic and Political Risks
- Portfolio investments are sensitive to changes in economic policies and political stability.
- Sudden changes can lead to rapid withdrawal of funds, impacting the overall market and individual investors.
Liquidity Risk
- In some situations, investors may find it challenging to sell their investments quickly without incurring substantial losses.
- This is particularly true in less liquid markets or during economic crises.
In summary, while portfolio investments can offer high returns, they come with considerable risks that make them less safe compared to options like FDI, NRI deposits, or external commercial borrowing, which often provide more stability and control.
Portfolio investment is often considered unsafe compared to other types of foreign investments. Here’s why:
Market Volatility
- Portfolio investments primarily involve purchasing stocks, bonds, or other securities, which are subject to market fluctuations.
- Investors can face significant losses if the market experiences a downturn, making it riskier compared to more stable investments like Foreign Direct Investment (FDI).
Lack of Control
- Investors in portfolio investments typically have no control over the companies they invest in.
- This lack of influence can lead to unfavorable outcomes without any recourse for the investor.
Short-Term Focus
- Portfolio investments often emphasize short-term gains, which can lead to hasty decisions based on market trends rather than long-term value.
- This focus increases the risk of losses during market corrections.
Economic and Political Risks
- Portfolio investments are sensitive to changes in economic policies and political stability.
- Sudden changes can lead to rapid withdrawal of funds, impacting the overall market and individual investors.
Liquidity Risk
- In some situations, investors may find it challenging to sell their investments quickly without incurring substantial losses.
- This is particularly true in less liquid markets or during economic crises.
In summary, while portfolio investments can offer high returns, they come with considerable risks that make them less safe compared to options like FDI, NRI deposits, or external commercial borrowing, which often provide more stability and control.
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Which type of foreign investment is considered as unsafe?a)Foreign Direct Investment (FDI)b)Portfolio investmentc)NRI depositsd)External commercial borrowingCorrect answer is option 'B'. Can you explain this answer?
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