In recent decades, Mutual Funds have become increasingly popular among investors. This popularity can be ascribed to the many benefits that they can provide investors. When you add the offshore element to the equation you can start to see why these type of investments have been flourishing in many offshore jurisdictions worldwide. However, like with any investment, there are significant disadvantages too that must be accounted for before making any decisions.
Before proceeding to understand the potential arguments for and against Offshore Mutual Funds, I think it would be advisable to explain the basics about these funds.
Mutual Fund vs. Offshore Mutual Funds
A mutual fund is a type of investment in which numerous investors pool or group their capital together with the objective of investing in a range of assets.
Offshore mutual funds are those that are invested in companies outside of the investors' national borders to increase the returns on the investments.
Mutual funds are operated by fund or money managers. The money managers are in charge of investing the pooled capital in the fund to try to increase the value of the investment and income for its investors. The money managers do this by investing in various asset classes such as bonds, stocks, commodities and other money market instruments. One of the main benefits of pooling money in such a fund is that it allows smaller investors access to diversified portfolios that are professionally managed, and that are usually very difficult to create (let alone access) with smaller amounts of capital.
The investors share any gains or losses proportionally, depending on the initial investment. Mutual funds are also simple investments with lower risks than investing large amounts of capital alone.
Each mutual fund (whether domestic or offshore) has a specific stated objective. The fund’s objective is laid out in the fund's prospectus, which is the legal document that contains information about the fund, its history, its officers and its performance. Some popular objectives of a mutual fund might include:
As mentioned previously, investors have started investing their capital in offshore entities mainly to take advantage of lower levels of regulation and more tax-efficient laws, which are prevalent in such financial jurisdictions. Investments in tax haven jurisdictions offer higher rates of return for both parties in a mutual fund, i.e. the fund purchasers and the fund managers. Management companies who oversee these offshore accounts also help their investors by delaying or eliminating taxes on their own profits. The lack of limits, beyond competition, on the fees paid to management companies is another lure for investors.
Arguments For (Pros) Offshore Mutual Funds
Arguments Against (Cons) Mutual Funds
Despite the many benefits that I have highlighted above, you are recommended to approach any investment in an offshore mutual fund with an awareness of the following shortcomings.
By Mawdud Choudhury, CEO of Meedah Group Limited
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