Offshore funds allow you to choose from funds that can be based on geographies like US, Europe, Brazil, Japan, or it can be theme specific like consumption, mining, agriculture, real estate and so on. Some funds do not restrict investments to some geography or theme and invest in companies across globe.

Among the many reasons, an investor may choose to invest in an offshore fund for the following purposes-

1. If economic conditions in the domestic market are not attractive, investors look for opportunities in overseas market to gain higher returns

2. The investor may be looking for diversification of the portfolio by having an international exposure

3. Investor may want to take advantage of exchange rate difference

Benefits of investing in international markets through Mutual Funds are:

1. You do not have to go through the difficult task of selecting stocks on your own because mutual fund is a simple way to invest in international markets.

2. Get exposure to stocks of global corporation giants like Apple, Google, Amazon, etc.

3. Higher returns when other economies grow at a faster pace than the domestic economy,

4. Investing in a particular opportunity only available in offshore markets.

5. The advantage of the exchange rate differential between the two economies. For instance, if you have invested in a fund that's US-centric, you will benefit if Rupee depreciates and US Dollar becomes stronger.

However, just like any investment option, investing in overseas funds does carry certain risks.

What are these risks involved?

Market risk - Performance of the investment in international markets will be impacted by various micro and macro-economic factors of the country the mutual fund house invests in. You must be aware of the country-specific risk involved.

Any changes in government regulations and policies relating to companies, industries, investments, and so on may make the investments unattractive. Geopolitical events such as trade wars between US and China, as well as Brexit can impact the performance of the fund.

Currency risk-International investments have exposure to foreign currency assets. Fluctuations in exchange rate can impact your returns. For example, if you have invested in a fund focused on US, your returns may drop if Indian Rupee appreciates and US Dollar becomes weak.

[Read: Should You Invest In International Funds To Benefit From Weak Rupee?]

Apart from risks and benefits, one should also be aware of the tax implication of investing in such avenues. For the purpose of taxation, offshore funds are treated as non-equity mutual funds.

Therefore, short-term capital gains will be taxed as per the income tax slab applicable to the investor, whereas long-term capital gains will be taxed at 20% with indexation benefits or 10% without availing indexation benefit.

Should you invest in offshore funds?

Offshore funds can form a part of your portfolio if it provides diversification. Just keep in mind, aimless diversification will not benefit your portfolio. Additionally, the assets of your existing portfolio should have a low correlation with the asset you are looking to invest in.

If you are an Indian investor, it will make more sense to invest in economies like US or Europe, rather than in emerging economies whose market/s movement is frequently parallel with Indian markets.

If your existing portfolio is well in place, offshore funds need not form a part of your portfolio. You may however, allocate a small portion towards offshore funds to diversify across geographies. Having said that, it should not form part of your `Core portfolio'. Your Core portfolio should contain a well-diversified domestic allocation of equities.

Before investing, understand the risk involved in investing in offshore funds and specific countries, region, themes, etc. Invest only if the risk profile of the fund aligns with your own. Also be aware of the international cyclical and seasonal trends of investment that impact a particular country. Ideally, the benefits of such investment should outweigh the risks involved.

The mutual fund houses invest part of their assets in domestic companies. Some may retain a higher allocation towards foreign companies, while others may tilt the allocation higher towards domestic companies. So make sure to check the allocation before you invest in the fund.

[Read: Asset Allocation: Hocus-Pocus Or The Essence Of Successful Investing?]

It is beneficial to stay invested for long-term to avoid short-term volatility. You can check the past performances of various offshore funds to select the right fund as per your needs.

Lastly, do not exit the funds as soon as the international markets turn volatile. Check the reason for the volatility. If it is a short-term volatility, you need get worried about it. In such situation, review the performance of your fund so that you make an informed financial decision.

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