Building and diversifying wealth while living outside the US remains possible for American expats, but traditional mutual fund investment options have become significantly more limited.
Due to regulatory crackdowns and brokerage restrictions, many mutual fund providers no longer accept new US expat clients.
Understanding these changes and exploring compliant alternatives is essential for making smart, tax-efficient financial decisions abroad.
In this article, key topics we’ll cover include:
- Understanding mutual funds and how it works
- The 4 Types of mutual funds
- Possibility for US expat mutual funds investment
- The best mutual fund investment options for American expats
If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me ([email protected]) or WhatsApp (+44-7393-450-837).
This includes if you are looking for a free expat portfolio review service to optimize your investments and identify growth prospects.
Some facts might change from the time of writing. Nothing written here is financial, legal, tax, or any kind of individual advice or a solicitation to invest.
What is Mutual Fund Investment?
A mutual fund is an investment vehicle that pools money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other assets.
Instead of choosing individual securities, investors buy shares of the mutual fund, giving them access to professionally managed investments aligned with a specific strategy or asset class.
Each mutual fund is managed by a fund manager or team of professionals who make decisions based on the fund’s objectives.
Mutual fund investment options offer a convenient way for American expats to invest globally without needing to monitor the markets daily.
Compared to holding individual stocks or bonds, mutual funds spread out risk and are generally easier to manage, particularly when access to certain financial products is limited while living abroad.
What Are the 4 Types of Mutual Funds?
The main mutual fund types are equity funds, bond funds, money market funds, and target date funds.
Each type is designed to meet different risk appetites and investment goals.
Understanding the four primary categories can help investors build a globally diversified and balanced portfolio.
1. Equity Funds (Stock Mutual Funds)
These funds invest primarily in stocks and are designed for long-term capital growth.
- Pros of equity funds: Potential for higher returns over time, wide range of sectors and geographies.
- Cons of equity funds: Higher volatility, may not be ideal for short-term needs.
2. Bond Funds (Fixed Income Funds)
Bond funds invest in government or corporate debt and aim to provide regular income.
- Pros of bond funds: Lower volatility than equity funds, useful for capital preservation and income.
- Cons of bond funds: Sensitive to interest rate changes, returns may be lower than stocks.
These low-risk funds invest in short-term, high-quality instruments like Treasury bills.
- Money Market Funds Pros: High liquidity, low volatility, useful for emergency reserves or short-term needs.
- Money Market Funds Cons: Minimal returns, may not keep up with inflation over time.
4. Target Date Funds (Lifecycle Funds)
Target date funds hold a mix of stocks, bonds, and other investments.
The asset allocation automatically adjusts over time, starting with more growth-oriented investments and gradually becoming more conservative as the target retirement date approaches.
- Target Date Funds Pros: Hands-off investing with built-in rebalancing, ideal for retirement planning.
- Target Date Funds Cons: Less flexibility for investors who want to actively manage risk or asset allocation.
For American expats, the right mix depends on factors such as risk tolerance, investment horizon, tax residency, and access to specific fund platforms.
Balanced funds and global equity funds are often popular due to their diversification and long-term growth potential.
Can US Expats Invest in Mutual Funds?
In recent years, it has become increasingly difficult for American expats to invest in mutual funds.
While it’s technically possible, regulatory changes and brokerage restrictions mean that access is now highly limited.
Regulatory Challenges for Expats
The Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to report US-held accounts to the IRS, leading many non-US banks and brokers to refuse service to American citizens entirely.
On top of that, most foreign mutual funds are classified as Passive Foreign Investment Companies (PFICs), which are subject to unfavorable tax treatment and complex IRS filing requirements.
Even more critically, many US-based brokers have tightened restrictions on clients with overseas addresses.
As a result, it’s common for US expats to be denied access to new mutual fund investments or have their accounts closed entirely.
IRS Reporting Obligations
US citizens must continue filing US tax returns no matter where they reside, including reporting all global income and disclosing foreign financial accounts via FBAR (FinCEN Form 114) and FATCA (Form 8938).
Investments in PFICs trigger additional reporting through Form 8621, which can be time-consuming and costly to manage.
Limited Access Through US Platforms
Historically, some expats have managed to invest in US-domiciled mutual funds through custodians and brokers based in the US.
However, due to tightening enforcement and internal policy changes, many of these platforms no longer accept new clients living overseas or restrict mutual fund access for existing accounts.
What are the alternatives to mutual funds?
Given these constraints, many American expats are turning to alternative vehicles such as:
- US-domiciled ETFs, which may be more accessible through certain platforms and avoid PFIC complications.
- Individually managed accounts (IMAs) tailored by expat-focused advisors.
- Global discretionary portfolios offered by wealth managers experienced in cross-border investing.
Is Mutual Fund a Good Investment for American Expats?
In most cases, no. Mutual funds are no longer the most practical or accessible investment option for American expats.
Due to increased regulations like FATCA and broker restrictions, many US expats can no longer open or contribute to mutual fund accounts.
Access is limited, and foreign mutual funds often trigger severe tax consequences under PFIC rules.
However, if you already have access to US-domiciled mutual funds through a compliant platform, they can still offer benefits such as diversification, professional management, and liquidity.
Significant Risks and Drawbacks of Mutual Funds
- Restricted Access: Most major US brokerages block mutual fund trading for expats due to FATCA.
- Tax Hazards: Foreign mutual funds are treated as PFICs, leading to higher taxes and burdensome reporting.
- High Fees: Actively managed mutual funds often carry higher fees than ETFs.
- Ongoing Reporting: Even compliant holdings may require FATCA and FBAR disclosures.
Who should invest in mutual funds?
- Expats with legacy US accounts that still allow mutual fund investing.
- Those with access to US-based advisors or platforms specializing in expat compliance.
- Conservative investors who value simplicity and are not affected by current access issues.
Best Mutual Fund Investment Options for American Expats
For American expats who still have access to US-domiciled mutual funds typically through legacy accounts or specialized advisory platforms, certain fund types can offer a good balance of diversification, performance potential, and tax efficiency.
Top Mutual Fund Options for US Expats (Where Available)
While each investor’s goals and risk tolerance differ, these categories of US-domiciled mutual funds are often well-suited for expats:
- Global Equity Funds: Invest in companies worldwide, offering geographic diversification and exposure to emerging and developed markets.
- International Bond Funds: Focus on government and corporate bonds outside the US, which can help hedge against currency risk or economic shifts.
- US Tax-Efficient Funds: Funds that minimize taxable distributions, ideal for expats who want to reduce their US tax liabilities.
- Dividend Growth Funds: Offer consistent income with the potential for capital appreciation, useful for retirees or those seeking passive income abroad.
- Target Date Retirement Funds: Automatically rebalance over time based on a retirement horizon, providing simplicity and long-term strategy in one investment.
Which Mutual Fund is Safe and Offers the Highest Return?
There’s no single mutual fund that’s both the safest and offers the highest return, but understanding how different types of funds balance risk and reward can help American expats make informed choices that match their financial goals.
What Influences Safety and Returns?
- Fund type: Bond and money market funds are generally safer, but offer lower returns. Equity and global growth funds tend to be riskier but can deliver higher long-term gains.
- Geographic exposure: Funds that invest in developed markets (like the US, UK, or EU) are often more stable. Emerging market funds can offer high returns but with more volatility.
- Fund management: Actively managed funds may outperform in some markets, but they often come with higher fees. Index funds, which passively track market benchmarks, tend to have lower fees and consistent returns.
- Economic cycles: A fund that performs well in bull markets might lose value quickly during downturns. Diversification helps smooth out these swings.
Conclusion
Mutual fund investment options for American expats offer a simple, diversified way to build wealth while living abroad.
With the right funds, expats can access global markets, manage risk, and aim for long-term growth.
Just remember:
- Not all mutual funds are accessible to US expats.
- Tax rules like FATCA and PFIC can affect returns.
- Choosing the right fund depends on your goals and risk tolerance.
For best results, consult with an advisor who understands expat finances and cross-border tax planning.
Pained by financial indecision?
Adam is an internationally recognised author on financial matters with over 830million answer views on Quora, a widely sold book on Amazon, and a contributor on Forbes.
