Offshore Mutual Funds
Table of Contents
Offshore mutual funds are mutual fund schemes that make investments in international markets and hence, are also often referred to as 'international funds'. These schemes invest in stocks of overseas firms or MNCs (multinational companies). They may also invest in fixed income securities of a country or a region. Offshore funds are required to comply with the mutual fund guidelines issued by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). The asset management company managing the offshore funds also need to comply with the regulations of the foreign country where they are registered.
Offshore funds are structured similar to an open-ended investment fund, as an offshore firm, partnership, or a unit trust. In India, offshore funds are available to investors in the form of thematic, country-specific, and region-specific funds. If you are an Indian resident and wish to invest in offshore funds, you can do so only in Indian rupees.
Benefits of investing in Offshore funds
- Offshore funds, because of their international incorporation, make establishing and administering the funds easy due to the lower regulation levels. This translates to the fund being able to reinvest the gains as the income is tax-free.
- The management fees and operating costs of offshore funds are lower.
- Offshore funds shield investors' capital from the high tax burden which they would have incurred if they invested in their home country.
- Offshore funds aid investors in diversification across geographies and can fetch them higher returns when the home economy is not doing great.
- Since offshore funds are usually incorporated in countries that offer tax rebates to foreign investors (tax havens), investors can expect attractive returns on their investment.
- Investors get an opportunity to invest in international brands and businesses.
Disadvantages of investing in Offshore Funds
- Negative movement of the offshore currency can impact the returns.
- Returns can also be impacted by the market fluctuations, tax laws, policies, and other developments in both the offshore country and home country.
- Setting up an offshore fund requires a huge investment.
- A higher risk is associated with investing in offshore funds
Things to bear in mind before investing in an Offshore Fund
- Before investing in an offshore fund, ensure that you start small by allocating a small portion.
- Research on the political and economic conditions of the offshore location in which the asset firm is planning to allocate your investments on.
- Instead of being country-specific, choose funds that will expose your investments to global opportunities.
- Invest in funds that have a transparent transaction process and are financially strong.
Challenges faced by offshore funds in India
International investment inflows to India are collected and managed by offshore authorities as the fund managers who are based in India are not allowed to manage offshore mutual funds as per the guidelines issued by the RBI and SEBI. As a result, many asset managers who were employed to handle the offshore funds of Indian investors had to move to offshore sites. This posed a challenge in the way of growth of offshore funds in India.
Industry experts suggest that the above challenge can be curbed by adopting 2 solutions. The first one where funds houses should be permitted to manage offshore mutual funds from India itself without any tax being levied on them. The second solution is to allow overseas investors to invest in offshore funds set up in India directly. This has been approved by RBI in November 2015 following which REITs (Real Estate Investment Trusts) and AIFs can receive investments from international investors. Also, after the Finance Bill passed in 2016, taxation rules have been made transparent and simpler.
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