Difference Between Direct and Indirect Investment

Investing is the activity of sacrificing current resources or assets for future profits. One of the advantages of investing through digital platforms today is the potential for investors to invest directly or indirectly.

This can happen because this activity is now much easier with a mobile application. Therefore, investors can choose a direct investment style. However, what does direct and indirect investment mean? Check out the discussion below:

Definition of direct investment

direct investment (direct investment) is an investment activity that requires the investor to participate directly and be responsible for all capital management activities.

by page Investopedia Direct investment involves the purchase and management of assets such as factories or real estate.

The article on this page explains what . means. direct investment It is the direct purchase of the property or assets of a company in the hope of earning a profit or interest on that purchase. In this case, direct investment is not in the form of buying shares or other securities related to a listed company.

in indonesia We know the term domestic direct investment (DDI), and foreign direct investment. domestic direct investment It is the purchase of a real investment asset (such as a house, garden, etc.) by a domestic investor (WNI). Another term for DDI is domestic investment (PMDN).

meanwhile Foreign direct investment (FDI) is the purchase of real assets by foreign investors. This means that foreign investors directly buy or build companies in Indonesia and not just buy shares on the Indonesian stock exchange. in indonesia This type of direct investment is managed by the Investment Coordinating Committee (BKPM) and has a different name. Foreign Investment (PMA).

However, other sources say that what is known as direct investment is when an investor is fully involved in managing his assets. regardless of the type of asset he purchases. Even if investors buy shares He is still called a direct investor if he manages himself.

An example of direct investment in the first sense is the projects that BKPM offers for domestic and international investors, according to a report from BKPM. Indonesian businessIn September 2021, 32 projects worth Rp 58.5 trillion will be offered to investors by BKPM.

Meanwhile, according to PMA and PMDN recognition data from BKPM Per Q1 2022, there were 15,173 projects worth more than $10 million funded by foreign direct investment, and 53,926 projects worth over 135 trillion dollars being funded by DDI.

Definition of Indirect Investment

Indirect investing is a type of investment activity that does not involve direct investors in management. This type is often referred to as investment portfolio.

Some sources state that the purchase of financial assets in the capital market, such as stocks or bonds. belongs to this type However, what often means indirect investment is an investment that is managed transferred to a third party, for example: investment manager or a bank. An example is the purchase of stocks, bonds purchased through these two institutions.

Difference Between Direct and Indirect Investment

from the previous conversation There are several differences you should know about the above two types of investments, namely:

• assetSome sources state that direct investments include investments in physical assets only. while indirect investment buys only securities (securities).
• investor participation In the first category, investors must participate fully in all investment activities. while the second category has investment managers and banks that provide asset management services.
• regulatorDirect investments such as FDI and DDI are regulated by the Investment Coordinating Board (BKPM), while indirect investments in the form of capital market purchases are regulated by the Financial Services Authority (OJK).
• capital and duration. In general, direct investment requires a large amount of capital and for long-term purposes. Unlike portfolio investments in the capital market (indirect), which can only be short-term and long-term, in the latter category, the issued capital is also more diversified, starting from Rp 10,000. to millions of rupiahs

Pros and cons of direct and indirect investments

direct investment

The main advantage of FDI, both in the form of real assets and self-managed financial assets, is that investors are directly involved in managing these assets. This means that investors can buy or sell these assets based on the results of their own analysis.

The downside is that direct investments often require a large amount of capital. And investors need to allocate enough time to analyze the market and execute the strategy. In the case of purchasing real assets Investors have to go through a bureaucratic system that is different from investing in financial assets. And it is not uncommon for this bureaucratic mechanism to be complicated, especially for foreign investors.

indirect investment

On the other hand, the advantage of indirect investing is that investors do not have to manage their own assets. Because these assets are managed by an investment manager or bank. (which opens investment products) makes this category for novice investors.

In addition, this type of investment can also be purchased at a more affordable price than the first one. For as little as 100,000 IDR, you can get 10+ shares, dozens of mutual funds and bonds on the secondary market.

The downside is that mutual fund investors, deposits and bank investors cannot manage their own assets. And the profit received may be less than the profit from direct investment.

Is it better to invest directly or indirectly?

Regardless of the purchase of physical assets or self-managed financial assets. Indirect investing is still the best type of investment for novice investors. Due to the small amount of capital required It is managed by the institute and a team of experts. and time is flexible

However, direct investment may be the best type for you. If you have enough resources, such as opening your own business or managing your assets directly. Please note that the resources here are not just capital. but also knowledge, energy, and time.