Offshore Mutual Fund

Written By
Paul Tracy
Updated August 5, 2020

What is an Offshore Mutual Fund?

An offshore mutual fund is a mutual fund based in another country.

How Does an Offshore Mutual Fund Work?

Offshore mutual funds cannot be sold in the United States unless they comply with American regulations; however, they can invest in U.S. securities.

Let's say John Doe has $100,000 to invest in mutual funds. If he invests the money in American mutual funds, he will pay, say, a 1.5% management fee, as well as capital gains tax on anything he reinvests in the funds.

If, however, John Doe invests the $100,000 in mutual funds in Country X, which has less regulation and no capital-gains taxes, he may pay, say, only 0.75% in management fees and $0 in capital gains taxes on reinvested funds.

Accordingly, given two identical mutual funds, John's returns are higher from the offshore mutual fund.

Why Does an Offshore Mutual Fund Matter?

Offshore mutual funds are sometimes in low-tax countries, which is why they can be attractive to investors in high-tax countries. It is important to note that the degree of regulation also differs among countries, which means offshore funds may have less operating overhead (and thus lower fees), but investors may also be prone to scams when investing in low-regulation countries. In some cases, offshore-fund assets are excluded from U.S. estate tax calculations.