Risks of investing in offshore funds

With the depreciation in rupee and the downtrend in the equity markets, investing in offshore funds has become lucrative. This view is vindicated by the fact that some of the US-centric diversified mutual funds have generated handsome returns ranging from 16% to 25% over the last one year.

But the returns from offshore funds come with attendant risks and there are quite a few risks involved in investing in offshore funds which investors should bear in mind before investing in these funds. Some of the key risks involved include:

·        Risk of fluctuation in currency: If the rupee appreciates against the currency of the country in which the fund has invested, the returns generated by the fund will be adversely impacted as, in the event of such appreciation, the currency of the concerned country will fetch lesser amount on conversion in rupees. Conversely, if the rupee depreciates against the currency of the other country, the returns would be impacted positively.

·        Risk of global geopolitical events and issues: The global geopolitical events and issues impacting the stock market and currency market of the other country will adversely impact the returns generated by the offshore mutual fund. 

·        Country-specific macroeconomic risk: The performance of the mutual fund investing in equities and other financial assets of another country would be impacted by the performance of these assets in that country which, in turn, will depend on the macroeconomic factors in that country. So, if the GDP growth of that country decelerates due to decline in industrial production along with rising interest rates, unemployment and inflation, the performance of the fund would be adversely impacted.

·        Risk of change in regulations and policies by the government: If the government of the country in which the offshore fund has invested changes its policies and regulations relating to investments, imports, exports, etc., and if these changes are unfavourable for mutual fund investments, it can affect the returns of the scheme.

In view of the above factors, investors need to be extra cautious while investing in offshore funds.