A Closer Look at Offshore Mutual Funds

For many years, investing in offshore mutual funds has been the choice of many investors looking to diversify away from domestic funds. There are a lot of misconceptions out there about this type of investment. Here are the basics of offshore mutual funds and whether they are actually good investments for you.

What Are Offshore Mutual Funds?

An offshore mutual fund is a mutual fund that has its headquarters somewhere outside of the United States. Typically, this term is reserved for a company that is doing business in a foreign country. Sometimes, investment brokerages that do business in the United States will set up an alternative location in another country and conduct the business of the mutual fund through that office. Other times, you will be dealing directly with a company that conducts all its business outside of the United States. 

Tax Evasion

In the past, an offshore mutual fund was a great place to invest so that you could avoid paying income tax. Many investors that were looking to earn a return without paying the government any money could simply invest in an offshore mutual fund, and there was no tax liability on the profit. However, in recent years, the IRS has changed this significantly. Now, any income that you make anywhere in the entire world will be taxed if you are a United States citizen. Therefore, the perception that you can invest in a foreign country and avoid paying taxes is inaccurate. As a citizen, you are responsible for reporting any income that you make regardless of the country that it originated in. If you do not, you can be prosecuted for tax evasion.

Benefits

Although investing in an offshore mutual fund is not as attractive as it once was, it still does offer you some benefits. For one thing, being in a country that has a lower tax rate could benefit the management of the fund. Since the mutual fund may not actually have any dealings in the country in which it resides, it may not have to pay taxes to that country. Therefore, this could result in lower fees that you have to pay for management. The less fees that you pay, the more profit you can make.

Investing in a foreign mutual fund can also allow you to diversify your investments. Instead of simply relying on one individual market to bring in your returns, you can diversify the risk over several different countries or regions.

Risks

Investing in offshore mutual fund carries with it a fair amount of risk as well. There have been many scams in this industry over the years. Therefore, before investing in this type of fund, you will want to make sure to do your research. Try to get involved only in dealings with reputable companies. Otherwise, a company could potentially take your money and run because of the lack of regulation in a foreign country.

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