First time investors are often confused by the difference in offshore mutual funds and mutual funds in this country. The concepts are actually fairly simple, but it’s easy to get confused by all the terminology that goes floating around. Here’s a basic overview of offshore mutual funds, what they are sometimes called, and why they might be a good investment for your portfolio.

Offshore mutual funds are simply mutual funds that are domiciled and managed outside of the United States. Sometimes the confusion with offshore mutual funds comes from the way they are described. For example, in the UK, mutual funds are often referred to as open investment trust or pooled fund. The name is different, but these investment funds often work exactly the same as mutual funds here in the US. To add to the confusion, many American mutual fund companies offer offshore mutual funds that are basically exactly like a domestic fund that they carry. So, you ask, why bother?

Well, the thing you need to understand about offshore mutual funds are the tax implications. Sometimes offshore mutual funds are tax exempt, meaning you can save quite a bit of money by putting it in these funds rather than domestic ones. It’s a simple concept; some jurisdictions outside the country allow tax exempt interest on mutual funds just like the interest on some foreign bank accounts. Some of the most popular jurisdictions for investing in mutual funds are Bermuda, the Cayman Islands and the Bahamas. Each of these areas allow mutual funds to be exempt from local taxes as long as the investors are not local residents. In addition, many offshore mutual funds charge fewer fees than US mutual funds. Most large American mutual fund companies have some offshore mutual funds available to their investors. It’s worth your time to check out these offshore mutual funds, because by investing in them, you may be able to avoid paying taxes on your capital gains and dividends to the country where your investment is held, and you may save money overall on fees. In addition, investing offshore allows you to diversify your portfolio even further, avoiding some of the volatility you might encounter by having all of your money invested in the American market.

It’s likely that you have not heard of offshore mutual funds. US law prohibits offshore mutual fund companies from soliciting US investors. This law is designed to protect investors from unscrupulous scam artists. But, the downside to this law is that it can also prevent people from having a good understanding of offshore mutual funds that are legitimate. In addition, many offshore mutual fund companies don’t want US investors because of the strict filing regulations imposed on these companies by the Securities and Exchange Commission and the IRS. Still, it is possible for some investors to benefit from investing in offshore mutual funds, particularly in situations where investors are paying high fees that can be reduced by using offshore investment companies.

Keep in mind that investing in offshore mutual funds does not remove your requirement to pay federal taxes to the US government. In the past there were many tax loopholes that could help investors avoid paying federal taxes on money that was held offshore. But, those loopholes are rapidly closing. Before you invest in offshore mutual funds, be sure to consult your investment counselor and your tax advisor to determine if this sort of investment is right for you.