What are Offshore Funds? Benefits & Risks of offshore funds

Every investor is faced with a range of choices if he/she wants to diversify an investment portfolio. Diversification can help combat any financial risks if it is used appropriately while selecting different assets/investments. One of the many newly introduced investment options these days is offshore funds. As investors continue to explore newer options for added benefits and risk mitigation, offshore funds have also gained entry to the ‘suitable investment’ category for many.

Here, we will explore the concept of offshore funds and discuss its benefits, flaws, taxation, and other aspects that investors should know before investing. 

What are offshore funds?

An offshore fund is a type of mutual fund scheme that primarily invests in equities or fixed-income securities of a specific country or region. These funds may be country-specific, for instance, US-focused, India-focused, etc or region-specific. These can also be sector-specific, where the investment focus is in selected sectors like energy, real estate, etc.

Offshore funds are actively managed by fund managers, who along with the fund house’s board will decide on the investment avenues for the fund.

Benefits of investing in offshore funds

There are many global companies whose stocks are not listed on the Indian stock exchanges. Some of these include IT giants and FMCG companies, which can be good investment opportunities due to their scale of growth. To invest in such companies, one can go through the offshore funds’ route as it can help an investment portfolio gain diverse geographical exposure. 

Point to consider

Suppose you have invested a total of Rs. 10 lakhs in various Indian stocks. If the Indian stock markets are in a bear phase, your portfolio could be in the red. If, however, you park some of this corpus in an offshore fund, chances of achieving positive returns through exposure to international stocks are high, even when Indian stocks are not performing well.

Risks involved in offshore fund investment

Apart from the usual risk of investing in equities, offshore funds may expose investors to foreign exchange risks. This is mainly due to fluctuations in the value of the rupee against other global currencies. While investing in offshore funds, an investor invests in rupees. The fund will then invest in international stocks using other currencies, thereby exposing investors to currency risk.

Let’s see how this works:

If suppose, the rupee depreciates against the dollar, every dollar invested will fetch more rupees and the fund’s NAV will be higher. However, if the rupee appreciates against the dollar, the fund will earn fewer rupees per dollar investment.

How is income from offshore funds taxed?

From a taxation standpoint, offshore funds are considered non-equity mutual funds. Hence, if an investor earns short-term capital gains from these, the same will be taxable as per the applicable income tax slab. Any long-term capital gains from this investment are taxable at 20% with indexation benefits or 10% without indexation benefits.

Fear of double-taxation

In 2015, there was an amendment to the Income-tax law. It stated that earnings from certain offshore funds could be claimed as tax exemption if the fund manager of the scheme is based out of India and certain other criteria of investment are met by the fund. This came as a sigh of relief for investors who feared the possibility of double taxation on earnings from offshore fund investments. 

What should investors know before investing in offshore funds

Some of the factors to keep in mind before investing in offshore funds are:

• It is advisable to opt for funds that are financially stable and offer investors sufficient transparency about their transactions.
• Investors who have never invested in foreign equity before must ensure, to begin, with a small investment to contain overall exposure and risk.
• Staying updated about the ongoing economic and political situation of the country in which the fund is invested can offer good insight for appropriate investment planning.
• Funds that offer exposure to substantial global opportunities instead of being country-specific should be preferred.

Conclusion

Offshore funds are the talk of the town among mutual fund investors who want to explore wider shores to enhance their portfolio returns. This investment form is attracting new investors who believe that developed markets like the US are capable of faster recovery from market disruptions. All in all, these funds offer a good opportunity for investors who cannot directly invest in foreign markets but prefer to have foreign investment exposure in their portfolios.

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