Onshore vs. Offshore Funds: Exploring the Differences

Onshore vs.Offshore Funds: Exploring the Differences
Feb 2024
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Investors today have diverse strategies at their disposal to build a strong investment portfolio. One of the key challenges that they face is whether to opt for onshore funds or offshore funds. These two options have distinct characteristics, and understanding their differences is crucial to best leverage them.

Onshore and offshore funds cater to different investment needs and objectives. When it comes to onshore vs. offshore investment funds, the right choice between the two ultimately depends on your specific financial goals, risk tolerance, and tax situation. In this blog, we will get familiar with the differences between onshore and offshore funds to help you make informed decisions.

Onshore vs. Offshore Funds – Know the Key Differences

1. Location:
What are onshore funds? As the name suggests, these are investment funds that operate within the investor's home country. They are subject to the financial regulations and laws of that specific country. These funds are also known as domestic funds, for example - Alternative Investment Funds, Mutual Funds, etc.

What are offshore funds? Also known as foreign or international funds. These funds are established and operated in a foreign country, away from the investor's home country. These funds are typically domiciled in offshore financial centres like the Cayman Islands, Luxembourg, or the British Virgin Islands. Funds established in GIFT IFSC are also treated as offshore funds.

2. Regulations:
Onshore funds are subject to certain rules and regulations from the local financial regulatory authorities. In India, for instance, onshore funds are regulated by the Securities and Exchange Board of India (SEBI). This aims to protect investors by ensuring transparency and compliance with laws.

Offshore funds are subject to the regulations and laws of the jurisdiction where they are established. These regulations may be less stringent compared to onshore funds, although it depends on the specific offshore location. The regulatory environment can offer certain benefits on taxation, flexibility etc. For instance, the International Financial Services Centre Authority (IFSCA) regulates offshore funds in India.

3. Taxation:
Investors in onshore funds typically pay taxes in accordance with their home country's tax laws. Capital gains, dividends, and interest income earned from onshore funds are subject to local tax rates. Tax efficiency varies from country to country, but investors can often take advantage of tax benefits and deductions specific to their home jurisdiction.

Offshore funds can provide tax advantages to investors. In many cases, offshore jurisdictions offer tax incentives or exemptions on capital gains, dividends, and interest income, making it a tax-efficient choice for some investors. However, tax implications can vary greatly based on the investor's home country and the specific offshore jurisdiction.

4. Accessibility:
Onshore funds are readily accessible to domestic investors. Investors can easily invest in onshore funds through brokerage accounts, financial institutions, or directly from the fund management company. This accessibility makes it convenient for investors to diversify their portfolios and access various investment opportunities.

Accessing offshore funds may require a bit more effort. However, investors can work with institutions providing offshore investment services to invest in a wider range of assets and markets.

5. Currency Considerations:
Onshore funds typically transact in the local currency. Therefore, investors can carry out transactions without any hassle of paying currency conversion charges and any other charges associated with the transactions in a different currency.

Offshore funds may transact in a variety of currencies, allowing for greater diversification to manage currency risk. They are often denominated in major international currencies like the U.S. Dollar, the Euro, or the British Pound, rather than the local currency of the offshore jurisdiction.

Our Offerings

Alchemy offers both onshore and offshore funds to its investors. The Onshore fund offered by Alchemy is in the form of Category III Alternative Investment Funds (AIFs) whereas the Offshore fund is a Restricted Non-Retail Scheme (akin to Category III AIF) registered with the International Financial Services Centre Authority (IFSCA) and is managed by Alchemy Investment Management LLP, the fund is USD-denominated India-focused long-only fund and has a long performance track record.

Here is a glimpse into our current offerings:

Onshore

1. Alchemy Leaders of Tomorrow – (AIF CAT III):
Alchemy Leaders of Tomorrow aims at capital appreciation over the long run by investing in listed equities and selectively (up to 10% of the portfolio) in PIPES/ IPOs/QIPs.

2. Alchemy Long Term Ventures Funds – (AIF CAT III):
The Fund will primarily focus on investments in small cap companies with up to 50% (Fifty Percent) or such other higher percentage as may be decided by the Investment Manager in accordance with Applicable Laws.

Offshore

Alchemy India Long Term Fund:
Alchemy India Long Term Fund (The Fund) is one of the US dollar-denominated Schemes of Alchemy Alternative Investment Trust, registered with the International Financial Services Centres Authority (IFSCA). The Fund was incorporated in June 2008 in Mauritius (managed by Alchemy Investment Management Pte Ltd., Singapore) and in April 2023 was migrated (along with investments and investors) to GIFT City in India (managed by Alchemy Investment Management LLP).

The Fund has a long vintage of 15 years and a strong track record. It has returned a CAGR of 11.3% compared to the S&P BSE 500 ($)'s return of 6.7% as of January 31, 2024, and has delivered an annualized alpha of 4.6% since its inception in June 2008. It is a long-only Indian equity fund to generate long-term absolute returns on the investors’ capital by investing in Listed Indian equities, IPO opportunities, and Private Investment in Public Equity (“PIPES”) on listed Indian equities.

Disclaimer:
This blog is for informational purposes only and should not be considered as an offer or solicitation to buy or sell any securities or make any investments. We recommend readers to take independent advice before taking any investment decisions. Please refer to our Disclaimer and Disclosures for more details.

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