Offshore funds, also referred to as International funds are mutual fund schemes that invest in the international markets. These funds mainly invest in overseas companies or MNCs, and have NRIs as investors, in most cases.
While investing in international mutual fund schemes, the fund houses need to comply with the provisions of the foreign country where they register. All the relevant licenses and qualifications involved in managing an offshore mutual fund are regulated by SEBI. Offshore mutual funds usually invest in units, shares, interests or partnerships, managed by a fund manager, a custodian, an administrator, and a prime broker.
As you plan to invest in international mutual funds, make sure ensure that you consider the following points-
- Be completely aware of the economic and political conditions of the country you are going to invest in
- Begin with investing small amounts of money
- Choose the funds that offer high exposure to the global markets and not just one specific country
- Ensure that you invest in only one fund from an emerging market and not more than that
- Be careful of the transparency and financial strength of the fund house before you invest
Advantages of Offshore Investments
Investing in mutual fund schemes outside the country has the following advantages-
- Offshore mutual funds bring further sectoral diversification to the country
- Investors get a chance to benefit from the international brands and businesses, while gaining direct access and exposure to the market across the country
- Investors of offshore mutual funds gain tax benefits since these funds are generally established in countries that offer tax efficiency to investors abroad
- AMCs start investing in these funds in offshore jurisdiction that involves lesser rules, and lower overall asset management costs
- According to the mutual fund tax rules, offshore funds come under debt, which implies that taxes on these funds are levied just like other fixed income funds
Disadvantages of Offshore Investments
While offshore investments carry multiple advantages, there are also a few disadvantages of investing in these funds. Therefore, while investing in international mutual funds, you must be careful of the following-
- One should avoid making short-term investments in international mutual funds. It is advisable to invest for the longer term in order to generate inflation-beating returns
- Investing in mutual funds outside your own country does not entirely save you from market fluctuations. Instead, it exposes you to the price, rates, market fluctuations, policies, tax laws, and other developments to a foreign country as well
- Negative movement of currency can impact your gains and losses
Offshore Investments- History
RBI and SEBI guidelines were such that they failed to encourage investments in international markets. Hence, there was a need to uplift the mutual fund sector in the country, due to which certain changes were made and rules and regulations were implemented upon the taxation on offshore investments.
In November 2015, RBI approved of the following changes-
- Fund houses in India were allowed to manage funds from India as an Indian entity without levying tax on them
- Direct investments in offshore mutual funds in India by overseas investors were allowed
- International investors were allowed to invest in AIFs and REITs (Real Estate Investment Trust)
In 2016, investments in offshore mutual funds adopted transparency in the taxation rules-
- Under Section 9A of the Income Tax Act, the challenges of offshore investments were considered and a few remedies were implemented. Revenue from ‘suitable’ offshore funds could claim tax exemption only if the fund managers based in India handled those funds.
- 10% limit on the investor’s share was implemented