What are Offshore Funds?
Offshore funds are mutual funds that invest across overseas markets – multinational and international corporations. Hence, they are also commonly referred to as international funds or foreign funds.
Additionally, they may invest in fixed income assets of a nation or region. Similar to other mutual funds, offshore funds fall under the purview of the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). Thus, these funds must adhere to the guidelines set by SEBI and the RBI. Furthermore, fund houses must adhere to the regulations of the country where the company in which they have invested is registered.
A foreign fund could be a foreign-controlled firm, unit trust, or limited partnership. Typically, investments will consist of units, shares, interests, or partnerships. An offshore fund is supported by a custodian, fund manager, administrator, and prime broker. SEBI stipulates that all of these positions require proper licenses and credentials.
In India, investors have access to offshore funds through thematic, country and region-specific funds. Furthermore, being an Indian resident, you can invest in these funds exclusively with Indian rupees.
Who Should Invest in Offshore Funds?
Investors who are seeking geographical diversification can invest in offshore funds. Offshore mutual funds are funds that invest across different international markets. The mode of investing for offshore funds can be either buying international stocks directly or buying funds managed by international asset managers. Thus, these funds can be actively managed funds or passively managed funds.
Thus, you can pick an active or passive fund depending on your investment criteria. Furthermore, a long-term investment horizon is recommended since these are primarily equity mutual funds.
Investing in an offshore fund will give you direct access and exposure to international companies, brands and businesses. Also, you can enjoy the benefit of professional fund management. Since these funds are established in countries that offer tax efficiency to foreign investors. Therefore, are good schemes to invest in to get some tax relief.
Therefore, investors seeking international exposure/ geographical diversification, tax-efficient investment options and a long-term investment horizon can invest in offshore funds. However, you need to be well aware of the risks involved and also the international markets across which the fund invests. For example, the economic trends of the company, geopolitical impacts, etc.
Explore: Passively Managed Funds
Advantages and Limitations of Investing in Offshore Funds
Following are the advantages of investing in offshore funds:
Investing in countries other than one’s own can minimise total market risk by spreading the risk across different asset classes and countries. Offshore mutual funds can help India diversify its industry holdings. Investors have the option to invest in multinational enterprises and brands and get exposure to the equities of global giants like Apple, Google, Amazon, etc.
Mutual fund investing is an easy way to access overseas markets, as they eliminate the hard work of selecting equities on your own.
Foreign currency investment witnesses higher returns when the rupee depreciates. It makes offshore funds an asset that provides exposure to the dollar and euro and hedges against rupee depreciation risk. This is particularly beneficial for individuals planning international expenditures.
Offshore funds are taxed similarly to domestic debt funds. These funds are often incorporated in countries that have tax-efficient policies for foreign investors. Thus, you can expect attractive returns on their investment. Also, these funds safeguard the capital of investors from the hefty tax burden they would have paid if they had invested in the domestic markets.
Flexible Regulations and Lower AMC Costs
The overseas jurisdictions, investment rules and overall costs for establishing an offshore fund are lower for an AMC. Due to their foreign incorporation, offshore funds are easier to form and administer because of fewer regulations. This means the fund can reinvest the gains since the income is tax-free. Furthermore, these funds have lower operating costs and management fees.
When the foreign economy is doing well in comparison to the domestic markets, the returns can be significantly higher from offshore funds. Thus, diversification across geographies might generate higher returns when the domestic economy is not doing great. Furthermore, having a long-term investment horizon will help investors generate inflation-beating returns.
Professional Fund Management
All of us may not be experts at investing. And when it comes to investing across geographies, you need to be extra cautious and watchful of the markets. Picking the right securities, exiting at the right time, and managing funds can all be tedious. That is where offshore funds come in handy. These funds are managed by a professional fund manager who does all the heavy lifting for you.
Following are the Limitations of investing in offshore funds:
The rates, market movements, regulations, tax rules and other happenings in both nations can affect your returns. Thus, you must be continuously monitoring the country’s progress and news. Any changes in government policies or regulations with respect to investments, industries and companies, etc., may impact the returns.
Negative Currency Movement
A negative change in currency value might impair the return on investment. Thus, it is important to carefully pick the countries in which you wish to invest.
Things to Keep in Mind While Investing in Offshore Funds
Following are the things to keep in mind while investing in offshore funds:
The impact of micro and macro-economic factors of the country in which the fund invests significantly impacts offshore mutual fund returns. Thus, you must be well aware of the country-specific risks associated with these funds.
Any changes in government policies or regulations with respect to investments, industries and companies, etc., may make offshore investments unattractive. For example, geopolitical events such as trade wars between the US and China, Russia and Ukraine, Brexit and the impact of the COVID-19 pandemic on an economy can impact the performance of the fund.
Offshore funds give exposure to foreign currency assets. Thus, fluctuations in the foreign exchange rate can have a significant impact on your returns. For example, invest in an offshore fund focusing on US markets. The investment returns may be lower if the Indian Rupee appreciates and the US Dollar weakens.