Should US citizens always avoid investing in foreign mutual funds?

I have often been asked if US citizens should steer clear of mutual fund investments in India because of the adverse tax consequence of any growth in the values being subject to tax at ordinary income tax rates in the US and that too on unrealized income.

The short answer is that this is not true of all cases. It is a factor of carried over foreign tax credits, tax credits from other passive sources derived in India that can be availed to offset this tax on mutual funds, the income levels and therefore the tax brackets of the tax payer being assessed, and finally the state where they reside. So no one answer suits all. We have several clients who as US persons who still find Mutual funds worth the tax cost.

Talk to your advisor on how best to use it.