What are offshore funds? Advantages and Disadvantages

The simplest and straightforward answer to that question would be that offshore Funds are open-ended investment schemes that invest in mutual funds, stocks, real estate assets, equities, fixed-income securities, etc. in the overseas market. 

Understanding Offshore funds

Offshore funds are often referred to as international funds or foreign funds as they are based on offshore locations and have non-residents as investors. These types of funds provide investment exposure to global markets but they have to comply with the rules and regulations of that country.

In India, both Indian residents and NRIs can invest in offshore funds either directly or through other funds under the purview of SEBI and RBI guidelines. The fund house has to comply with the set provisions and guidelines of the foreign country where they are registered.

The Indian resident can invest only in Indian currency just like any other investment scheme. 

You can:

• Select the offshore fund,
• Write a cheque for the amount due,
• Submit the cheque along with the application form to the fund house or online app you are applying through.

Types of Offshore Funds

“What are offshore funds?” is one of the most common queries of investors. In simple terms, it refers to investments that exist and operate abroad. 

The different types of offshore fund schemes are – 

1. Theme-based (real estate, power, energy, agriculture, etc.) 
2. Region-specific (Asia, Europe, etc.), and 
3. Country-specific funds (USA, India, UK, Australia etc.).

Additional read: What are international funds?

Advantages of Investing in Offshore Funds

• Investors can diversify their funds across geographical boundaries and choose the best available location for investing purposes.
• It is a golden opportunity to invest in global brands and business houses.
• The exchange rate difference will yield higher returns.
• Sometimes, the home economy is not so great but another country might be facing an economic boom. Investing in offshore funds will garner higher returns on investments at such times.
• Offshore funds are globally incorporated with lower regulation levels. As the income is tax-free it is profitable to reinvest the investment gains. 
• The operating costs and management fees associated with offshore funds are comparatively lower and financially beneficial.
• Offshore funds can safeguard the capital from the burden of high taxes in the home country

Disadvantages of Investing in Offshore Funds

• Offshore funds require higher investments, which every investor cannot afford.
• If the offshore currency is facing a downward trend then it will lead to lower returns.
• The risk factor associated is greater compared to domestic investments.
• Investors have to trust the foreign fund houses to explain the terms and conditions. In case of any discrepancy or fraud, it can result in a loss of capital.
• Tax laws, economic policies, and market fluctuations of both the home country and the foreign country will harm the returns.

Things to consider before investing in Offshore funds

• Research the economic and political conditions of the foreign country where you want to invest.
• Start with a small investment and gradually increase the investment. 
• Opt for financially stable investment funds at the onset.
• Check the fund’s reputation, the background of the fund house, and historical returns thoroughly.
• Choose funds that will help to cash in global opportunities.
• Consider the currency risk while dealing with international funds. Any currency fluctuation will impact the Net Asset Value of the fund directly because if the value of the rupee depreciates against the dollar NAV will be higher and in case it appreciates earnings will become less.
• Invest in developed and emerging markets only.
• Choose long-term investment as it is considered best for minimizing the impact of inflation.
• Foreign funds are treated under debt thus taxes are levied as per the tax rules in the home country. In India, residents have to pay tax on overall income even if it was generated in a foreign country. 
• Invest in funds with utmost security and transparency in the transaction process.

Challenges associated with Offshore funds in India

The RBI and SEBI guidelines do not allow fund managers based in India to manage offshore funds. The investment inflows to India are now managed by offshore authorities and this poses a serious challenge to the growth of offshore funds in India.

According to new guidelines REITs and AIFs are allowed to receive investments from foreign investors. 

Conclusion

By now the concept of what are offshore funds will be clear and you must have realized that these funds follow a different path in terms of rules and regulations compared to the standard investment journey. 

It is imperative to sound a word of caution for investors of offshore funds as these are prone to fraud and high risk quite often because of relaxed regulations.

Beware and take the help of reputed platforms like EduFund App which will act as a guiding tool in securing safe transactions in overseas markets.