By Mo Buglow -
The increasing popularity in offshore investing is largely due to the Internet, which removes geographic restrictions and allows individuals to research and reach their favoured financial institutions. An increase in the diversity of products and ownership techniques has further increased accessibility.
Offshore investing is normally far less regulated than onshore investing, resulting in more varied opportunities and greater potential returns, if often with a greater degree of risk. Depending on your circumstances, as an expatriate investing offshore, you may also benefit from taxation advantages.
The range of options open to expatriates can be daunting but a few simple questions may narrow down the choices that suit you. Consider your time-frame, for example. Factors such as imminent retirement, or perhaps investment with the aim of funding a future commitment, will determine this. Now let's look at the main types of investment and their degree of risk:
Deposit accounts. Interest rates vary with offshore accounts by jurisdiction and institution, but usually are better than at onshore banks. Risk is limited to failure of the institution, but some jurisdictions have investor compensation schemes, so that in the unlikely event that your bank goes under, your investment will have partial protection.
Money market funds. These are mostly a US phenomenon, although offshore variants do exist. Money market funds are mutual funds invested in short-term debt instruments. Domestic money market funds are usually highly regulated by authorities such as the US Securities and Exchange Commission.
Many offshore money market funds straddle national borders and are not subject to any specific high-tax country's regulatory regime. Their advantage is short-term, resulting in almost instant access. Returns are usually only slightly more attractive than on a deposit account.
Bonds. These are basically loans, except you are doing the lending. Units, or bonds, are purchased at the time of issue and are freely tradeable in the after-market, such as the Chicago Board of Trade. Bonds are issued by banks, companies or governments, with a set face value. They promise that this nominal capital will be repaid at a fixed future time, with interest. The total return is a mixture of interest and the difference between the purchase price and the amount due at maturity.
There is an enormous variety of bonds ranging from investment grade sovereign debt (depending on country), with almost no risk, returning the equivalent or a little more than bank deposits, to ``junk'' bonds, which are high-risk company debt issues. Junk bonds pay more than investment-grade bonds, but there is no free lunch. The issuers can and do go bust (remember WorldCom?).
Mutual funds. In a mutual fund, a group of investors pools money, which a fund manager invests at his discretion. The manager is charged with making respectable returns and navigating the market to avoid volatility. Mutual funds are a useful alternative to investing in stocks directly, proving a cost-effective method of building a diversified portfolio.
``Offshore'' mutual funds are more attractive for an expat who can make use of their tax advantages. Mutual funds can underperform, but there are many different types, specialising in both risky and relatively secure areas. Professional advice is still required.
Stocks. These are direct ownership through shares in corporations. Shareholders enjoy profits, reflected in a stream of dividends. They also have the inherent risks in running a business. If things go awry your stock could decrease in value or become worthless. Taxed dividends are usually paid out in the country of the main stock exchange listing.
Source: Bangkok Post
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