1. Offshore mutual funds
An offshore fund could be a corporation, a unit trust or a limited partnership with the authority abroad. Investments will usually be in the form of units, shares, interests, or partnerships. The force behind an offshore fund entails a custodian, a fund manager, an administrator and a prime broker. SEBI mandates all these functionaries to hold relevant licenses and qualifications.
2. Challenges of offshore funds in India
Offshore authorities largely amass and manage international investment influx to India. This is because RBI and SEBI guidelines do not encourage fund managers based in India to manage offshore mutual funds. Consequentially, many offshore funds that target Indian investors earlier employed asset managers, who moved to these offshore sites.
There is a strong case for shifting offshore fund activities to uplift our mutual fund sector at home. Therefore, to counter the aforementioned challenges, experts have suggested two solutions. One, permit fund houses to manage offshore funds from India without levying tax on them as an Indian entity. Two, allow direct investment by overseas investors in offshore mutual funds established in India. RBI approved this in November 2015. Now international investors can invest in AIFs and Real Estate Investment Trusts (REITs). In the 2016 Finance Bill, the taxation rules too were made simpler and transparent.
3. Recent remedies and results
The Section 9A of the Income Tax Act, amended in the 2015 Finance Bill, attempted to remedy the situation to some extent.
It clarified that revenue from ‘suitable’ offshore funds can claim tax exemption, if fund managers based in India handles them. This alleviated qualms about possibilities of double taxation. However, this too was restrictive in some ways – like the 10% limit imposed on one investor’s share. SEBI-listed foreign portfolio investors (FPIs) already comply with broad-based requisites of diversification when it comes to investor participation. So, it should pass the eligibility criteria by default.
4. Advantages of offshore funds
- Offshore mutual funds can give India further sectoral diversification
- Investors enjoy direct access and exposure to the international brands and businesses
- The strengths of 2 countries can join forces in terms of industrial innovation and quality. For instance, if Japan is the leader in electrical goods, India has world class IT services to offer
- Since offshore funds are generally established in countries that offer tax-efficiency to investors abroad, they get some tax respite
- An AMC starts them in offshore jurisdictions with less investment rules, the overall asset management costs would also be less
- As per mutual fund tax rules, offshore funds come under debt. So, they will levy taxes on your fund just like a fixed income fund
5. Disadvantages of offshore funds
- Remember to choose a long-term investment horizon to earn inflation-beating returns
- The price, rates and market fluctuations, policies, tax laws and other developments in both the countries can impact your returns
- You need to be vigilant of risks in the home country and offshore location
- Negative movement of currency value can counter even high gains
6. Things to know before investing in offshore funds
- Research on the economic and political conditions of the country in which your chosen fund house is planning to invest your money
- Start small and allocate smaller portion in the beginning
- Choose those funds that give you high exposure to global opportunities than being country-specific
- You must only invest one fund from an emerging market in a developed market, and not another emerging one
- Select funds known for being financially strong and transparent in their transactions