Offshore

With the end goal in mind, you can then divide your portfolio according to different types of asset classes based on their risk and return characteristics. Then look within each asset class, for instance equities, and consider the different funds including offshore funds that are available in that asset class.

The inclusion of an offshore fund into your portfolio could be because it diversifies investment risk geographically. Geographical diversification of your portfolio is accomplished when you invest in economies that either don’t correlate or have a low correlation with the local economy.

Holding investments in such non-correlated markets may help generate returns when domestic investments under perform. However, assuming that an offshore fund will automatically provide geographical diversification and in turn lower the risk levels of a portfolio is far too simplistic.

Some offshore equity funds that are heavily invested in countries around the region can behave very much like local funds. If you are explicitly seeking diversification, you must look for funds that go into countries with economies that are performing differently from the local market.

Investing in an offshore fund means that you will face risks such as currency, political and economic risks. You are putting your money in a country with unfamiliar currency, government, policies and market. This can have an adverse effect on your investment.

Even if a fund goes into different markets to reduce these risks, there is a possibility that you may lose some of your capital. Because everyone tolerates risk differently, in the end it is about selecting a fund manager that you trust and investing an amount that allows you to get a good night’s sleep.

The general recommended rule of thumb is to have around 10% to 20% of your portfolio invested outside the domestic economy. Basically, you would invest more locally because you are naturally more familiar with the local market condition, companies and what is going on.

The decision of how much to put outside the country still depends on your own comfort level, the rapidly changing environment of offshore markets and the general variation in each offshore fund investment style.

As investors are still relatively unfamiliar with offshore funds, it is advisable to start your offshore fund investment with 10% of your portfolio and slowly build up to 20% after gaining familiarity and confidence with the fund.

However, it would be more difficult to recover investments made in offshore funds in event that the fund company goes out of business. To retrieve your capital, you probably need to go to the respective country where the investment was made.

Also, bear in mind that investing in offshore funds should be a long term commitment. Investors need to be careful. The risks inherent in these funds can cause a volatile performance, which prompts investors to buy and sell at importunate times.