What are Offshore Funds? Know It’s Meaning, Risk & Benefits

Many mutual fund schemes offer exposure to the Indian financial markets. But what if you wish to gain exposure to markets outside the country? Here’s where the concept of offshore funds comes into the picture. 

In addition to sharing the same benefits and risks as regular mutual funds, these investment vehicles also have a few unique advantages and drawbacks of their own. Understanding them can help you navigate the various nuances of these funds better. Continue reading to find out all about offshore investment funds. 

What are Offshore Funds? 

Also known as international funds, offshore mutual funds are a type of mutual fund that invests in a wide range of securities in financial markets located outside India. Also known as international funds, these investment vehicles invest in stocks, fixed-income debt instruments or a combination of both. 

Unlike regular mutual funds, which are registered in India, offshore funds are usually registered in a foreign country. However, despite being registered outside the country, these funds still come under the purview of the Indian regulatory authorities — the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) — and are required to comply with all of the rules and regulations laid out for mutual funds. 

One of the key characteristics of offshore investment funds is that they are open-ended, meaning that you can purchase units as and when you wish without any restrictions. 

What are the Advantages of Offshore Funds?

Offshore mutual funds offer plenty of unique advantages to investors. Here’s a quick look at some of the key benefits. 

• Exposure to Foreign Markets

Investing in offshore funds can give you exposure to foreign markets that are usually out of reach for Indian investors. In addition to established international markets, the funds could open up access to emerging foreign markets as well. 

• Better Diversification 

Many offshore funds invest in fundamentally strong foreign companies such as Apple, Microsoft, Amazon and Google, among others. These companies have historically proven to be stable and capable of weathering adverse market conditions. Investing in funds that offer exposure to these companies can help you diversify your portfolio across geographies, protecting your investment from losing value more effectively. 

• Potential for Higher Returns

In addition to providing exposure to foreign markets, offshore funds may also offer the potential for higher returns, especially during times when the domestic markets are going through a challenging phase. 

• Tax Efficiency 

Offshore investment funds are usually registered in tax havens and countries with relatively flexible regulations and lower taxes. Such tax-efficient policies could not only reduce the tax burden but may also prompt the funds to reinvest more of the gains, leading to an increase in the Net Asset Value (NAV). 

• Lower Costs 

The costs of establishing and operating offshore mutual funds are generally much lower compared to funds registered in the domestic market due to favourable policies. As a result, the funds have lower expense ratios, which also play a huge role in enhancing the returns. 

• Hedge Against Currency Depreciation 

Since offshore mutual funds invest in international markets in foreign currencies, often USD or Euro, the gains from the fund get amplified if the Indian Rupee depreciates. By investing in such funds, you can effectively hedge against currency risk and depreciation. 

What are the Risks Associated with Offshore Funds? 

Despite the various advantages that offshore investment funds offer, they do have their own set of risks. As an investor, you need to know what they are to make well-informed investment decisions. Let’s quickly discuss some of the key risks associated with these funds. 

• Currency Risk 

Currency risk is the risk of an investment losing value due to currency depreciation. Although offshore funds may benefit from the Indian Rupee depreciating, the reverse may negatively impact the investments. For example, if either the Indian Rupee appreciates or the foreign currency in which the investment was made depreciates, the movement may affect your investment and cause it to lose value. 

• Offshore Risks 

Offshore mutual funds are also susceptible to developments in the country in which the fund is registered. For instance, any major changes in regulations, policies or tax laws in the host country could potentially affect your investments. Additionally, changes in Indian policies, especially taxation rules, may also impact the gains you get from your investments in these funds.

• International Market Risk 

If the foreign market in which the offshore fund has invested is going through a bearish phase, your investments may also underperform. 

• Liquidity Risk 

Liquidity risk is the risk of not being able to liquidate your investments within the desired timeframe. Offshore funds, especially those that invest in emerging international markets or assets with low liquidity, may have higher liquidity risks. This may lead to challenges when liquidating your investments and meeting redemption requests during periods of market stress.

Things to Keep in Mind Before Investing in Offshore Funds 

Before you proceed to invest in an offshore investment fund, there are a few factors you need to consider. Let’s take a look at what they are. 

• Do Proper Research and Due Diligence

Conduct thorough research on the fund manager, investment strategy, track record and regulatory framework of the offshore jurisdiction before investing your capital. This will ensure that you cover all bases and invest in the fund that’s right for you. 

• Understand the Tax Implications 

From tax reporting requirements to potential tax treaties between India and the country in which the fund is registered, you must fully understand the various tax implications of investing in offshore funds. If you still have any doubts or require clarifications regarding certain aspects, consider consulting an experienced tax professional. 

• Assess the Risk-Return Profile

Evaluate the risk-return profile of offshore funds and compare them with domestic investment options. This simple exercise will help you determine whether the potential benefits justify the associated risks.

• Start Slow 

If you’re new to investing in an offshore investment fund, it is advisable to start slow by committing a small portion of your investable capital. As you gain more experience, you could gradually increase your investment in the fund. 

• Opt for Global Market Funds  

Instead of investing in an offshore mutual fund that focuses on a single international market, consider opting for funds that invest in multiple offshore jurisdictions. This way, you can diversify your investments more effectively, mitigate jurisdiction-specific risks and enhance portfolio resilience.

• Select Transparent Funds 

Not all offshore funds may be transparent with respect to their holdings or transactions. Therefore, make sure to analyse the funds thoroughly and invest only in funds that are transparent with their operations. 

• Keep an Eye on International Economic and Political Developments 

As you’ve already seen, international micro- and macro-economic developments may negatively impact offshore investments. So, make sure to stay informed of the various global economic trends, geopolitical developments, regulatory changes and market dynamics that may impact your investments.

Conclusion

Offshore funds offer a gateway to global markets and let you enjoy advantages ranging from high return generation potential to better diversification opportunities. However, offshore investing can be complex and challenging, especially for new and inexperienced investors. 

Therefore, it is crucial to assess the associated risks and conduct thorough due diligence before investing. This way, you can not only harness the potential benefits of offshore mutual funds but also safeguard your investment portfolio. 

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