Offshore funds are emerging as a viable and better investment alternative for non-resident Indians, compared to the traditional non-resident (external) accounts where the Reserve Bank of India has recently imposed several restrictions.
While NRE deposits have been popular investment avenues for NRIs, a recent RBI circular has restricted the ceiling on interest rates to a maximum of 250 basis points over the London inter-bank offered rate.
The low interest rates thus have turned the NRI investors to offshore funds, which are now offering relatively higher returns.
Offshore funds invest in the shares of Indian companies but are priced in a foreign currency which provides overseas investors a currency risk-free access to the local markets.
According to Birla SunLife Distribution Company, India-dedicated offshore funds offer a lot of advantages. There has been a depreciation in the dollar vis-a-vis the rupee in the past one year.
Since offshore funds are normally priced in US dollars, the assets of these funds would be positively impacted by an appreciation in the rupee.
Offshore funds have the advantage of operating out of countries (Mauritius, for instance) which have an extremely tax-friendly regime. So these places offer tax exemptions which would not otherwise be available if the funds were based within India.
Most offshore funds are registered in Mauritius and they are exempt from withholding tax. So any income earned on the fund either through dividends or capital gains will not be taxed in India.
Currency risk is absent since returns are based on dollar net asset values and the investors usually invest directly in dollars.
According to BSDL, offshore funds have a lower expense ratio which average out to 1.75 per cent compared to domestic funds where the average ratio is in the region of 2 per cent.
Some of the offshore funds have given returns of around 20 per cent in the last one month while in the last one year returns have been in the region of a whopping 50 per cent.
Compared to this, equity schemes of domestic mutual funds have posted returns between 16 per cent for one month and around 39 per cent for one year.
However, there are also some risks involved in the investments in offshore funds. Liquidity poses some problems for investors. Some of the offshore funds are priced on a weekly basis which limits the entry and exit facilities to once a week.
Some currency risk is also there for those funds which maintain their portfolios in rupees but is marked to market in US dollars depending on each day's net asset value.
Redemptions also pose a major problem - since delays could be experienced reflecting the time involved for the fund to sell the underlying investments in India.
Further, the number of shares redeemed on any valuation day may be limited to 10 per cent of the total number of shares prior to the valuation day.
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