Investing Assets & Markets Mutual Funds Should You Invest in Offshore Mutual Funds? Pros and Cons of Investing in Offshore Mutual Funds By Kent Thune Kent Thune Twitter Kent Thune has spent more than two decades in the financial services industry and owns Atlantic Capital Investments, an investment advisory firm, in Hilton Head Island, South Carolina. He's written hundreds of articles for a range of outlets, including The Balance, Kiplinger, Marketwatch, and The Motley Fool. learn about our editorial policies Updated on March 5, 2022 Reviewed by Andy Smith Reviewed by Andy Smith Andy Smith is a Certified Financial Planner (CFP), licensed realtor and educator with over 35 years of diverse financial management experience. He is an expert on personal finance, corporate finance and real estate and has assisted thousands of clients in meeting their financial goals over his career. learn about our financial review board Fact checked by Lakshna Mehta Fact checked by Lakshna Mehta Lakshna Mehta is a writer, editor, and fact checker. She received a Master of Arts in Journalism, a Bachelor of Journalism, and a Bachelor of Arts in International Studies from the University of Missouri. She has had the opportunity to write and edit for newspapers, magazines, and digital publications on a wide variety of topics. As a fact checker for The Balance, she verifies all facts with credible sources and updates data as needed. learn about our editorial policies Photo: Getty Images Offshore mutual funds are investment securities offered by investment companies headquartered outside the U.S. These funds are typically used by non-U.S. investors, U.S. tax-exempt entities, and hedge funds. Offshore mutual funds may provide certain tax benefits, but these funds may not be appropriate for certain investors. Offshore mutual funds are mutual funds that have established headquarters in a country outside of the country where the investor lives. They may be structured like an open-end investment fund, which is like a conventional mutual fund used by investors in the U.S. The company offering the offshore mutual fund may be formed as an offshore company, a partnership, or a unit trust. For example, a mutual fund headquartered in a small country such as the Bahamas or the Cayman Islands may want to attract foreign investment from U.S. investors by offering tax incentives to invest in offshore funds. Mutual fund companies headquartered in the U.S. may also offer their non-U.S. investors opportunities to invest in offshore funds. In this regard, a mutual fund company may choose a particular country to establish headquarters in order to attract a certain type of investor. The general purpose of offshore investing is to seek advantages, such as lower regulation, tax-free income, or tax-free distributions to investors through international incorporation. Advantages of Investing in Offshore Mutual Funds Tax benefits: Foreign countries may offer tax benefits as incentives to attract investors outside of their respective countries. For example, a U.S. investor may choose to invest in an offshore mutual fund to reduce or eliminate income taxes or taxes on distributions that would normally occur in the U.S. Protection of assets: Moving assets offshore can prevent financial harm arising from various legal actions, such as foreclosure or seizure of assets from creditors. Confidentiality: Many countries hosting offshore mutual funds and other accounts have laws preventing disclosure of the account holder’s identity. Investors wishing to maintain privacy and confidentiality may benefit from investing in offshore mutual funds. Diversification: Investing in countries outside of one’s home country can reduce overall market risk by spreading the risk across various investment types, asset types, and countries. Disadvantages of Investing in Offshore Mutual Funds Changes in tax laws: Offshore investing has received greater political attention in recent years, and the tax laws associated with it have tightened to make tax loopholes more difficult. Therefore, using offshore mutual funds for the sole purpose of evading taxes is illegal.Cost and complexity: Offshore funds can be expensive and difficult to set up. In some cases, individuals must either be a resident or a business owner in the country in which they are investing. Therefore, establishing a residency or business in a foreign country can be expensive and complex, making offshore investing difficult for individuals. For individuals, the best way to invest in offshore mutual funds is through a brokerage firm that offers offshore investing. Keep in mind that you generally need to be a resident of the country in which you are investing. For example, if you are a non-U.S. citizen living in the Bahamas and you want to invest in mutual funds that are offered in the U.S., you may be able to access offshore mutual funds headquartered in the Bahamas but offered through a U.S. broker. The Bottom Line Investing in offshore mutual funds has become increasingly difficult in recent years, because of the abuse of tax evasion. Furthermore, many investors wanting to diversify overseas can simply buy shares of an international stock fund offered in their respective country. For example, a U.S. citizen can gain access to non-U.S. stocks by purchasing an international stock fund. The Balance does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. EDHEC Business School. "A Primer on the Tax Framework of Offshore and Onshore Hedge Funds," Page 20. Internal Revenue Service. "Failure To Report Offshore Funds Remains a Crime; IRS Includes Topic on Its 2019 'Dirty Dozen' Scams List."