What is a foreign fund?

What is a foreign fund?

A foreign fund is a mutual fund that invests solely in companies abroad and does not invest in corporations owned in the US.

Owning foreign companies can be a very good diversification strategy and is considered a core holding in the portfolio of most investors. Foreign exposure means that if the US economy hits a rough patch, you may have a hedge in the foreign fund if the companies or markets in other parts of the world are not entirely correlated.

There is an important distinction between the foreign/international funds of US-based mutual fund companies and the funds of internationally-based mutual fund companies. It used to be that US investors, particularly ex-patriots living abroad, could sometimes enjoy tax benefits by investing in the mutual funds of investment companies based in their country of residence, which might be India or elsewhere.

This is no longer the case, since the passage of FATCA (Foreign Accounting Tax Compliance Act): foreign-based mutual fund company shares held by Americans (including American ex-patriots living abroad) are categorized as Passive Foreign Investment Companies (PFICs), which are taxed under a somewhat harsh new regime.

Gradually various foreign countries are accepting the requests and mandates of the FATCA regulations that facilitate the flow of information about these companies and the funds held by American citizens.

What is Foreign Investment?
What is Foreign Investment Funds (FIF) tax?