You can broaden your investment horizons by incorporating international mutual funds into your portfolio.
Investing across various markets positions you to capitalize on economic growth in some regions while others may be stagnating or declining. A strategic approach to diversification is to invest in mutual funds that either focus on multinational companies with a global presence or target firms based in specific countries.
Though often grouped under the umbrella of “international funds,” these investments actually fall into four distinct categories: international, global, regional, and country-specific funds.
International and global funds
Also known as overseas funds, international funds invest exclusively in markets outside the United States. These funds offer broad diversification by including securities from both developed, slower-growing economies and the more volatile markets of developing nations. Some international funds focus on either mature or emerging economies, specific sectors, or thematic areas like sustainability or infrastructure.
Global funds, also referred to as world funds, include both U.S. and international stocks or bonds in their portfolios. The proportion of U.S. securities can vary significantly among global funds.
Despite what the name suggests, global funds often invest up to 75% of their assets in US companies.
Regional funds
Regional funds concentrate on specific geographic areas, such as the Pacific Rim, Latin America, Africa, or the Middle East. These funds aim to tap into the growth potential of rapidly expanding markets, offering investors access to regions that may be advancing faster than developed markets. They manage risk by diversifying investments across related, yet distinct, economies within the chosen region.
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Some funds redefine regional investing by focusing on countries that share common characteristics beyond just geography. For example, funds might group together emerging economies like the BRIC nations—Brazil, Russia, India, and China—based on their economic potential and growth prospects.
Regional funds often concentrate on groups of smaller countries or emerging markets where individual nations might not have enough investment opportunities to support a standalone fund. By pooling countries within a region, these funds can access a broader array of securities and investment opportunities.
The risks of investing in international funds
When you invest in international markets, your returns are influenced not only by the performance of the investments but also by fluctuations in the value of the US dollar relative to the currency in which the investment is denominated.
For example, if you invest in a European mutual fund with holdings in euros, the performance of those investments will be affected by how the euro changes in value against the dollar. If the fund earns a 10% return in euros, but the euro depreciates by 10% against the dollar, your overall return in dollars will be neutral, as the currency devaluation offsets the investment gain. Conversely, if the euro appreciates by 10%, your dollar-denominated return could exceed the fund’s 10% gain due to the favorable currency shift.
In essence, international investments can be more profitable when the dollar is weaker or losing value. However, they also carry risks similar to domestic investments, including potential political instability, especially in emerging markets.
Country funds
Country funds allow you to focus your investments on a single overseas nation, including those with restricted access for non-citizens. These funds can be particularly attractive when a country’s economy is performing well, or when emerging markets are experiencing rapid growth and expansion.
However, single-country funds are often structured as closed-end funds, which means they are traded on stock exchanges once they are established. Investing heavily in a single country can offer significant rewards if the nation’s economy thrives, but it also comes with the risk that a downturn in that country’s economy could negatively impact the fund’s performance.
Closed-end funds that acquire substantial shares in a country’s industries can significantly impact share prices and sometimes even influence corporate policies, similar to how institutional investors affect U.S. stocks. This concentrated investment can lead to notable shifts in market dynamics and corporate strategies within the target country.
Old or new funds?
Despite the global interconnectivity of markets through electronic platforms, the performance of individual markets is still largely influenced by domestic economic and political conditions. An investor’s experience in a particular market can vary significantly based on whether the market is mature or emerging.
A mature market is characterized by its status as an industrialized country with well-established securities markets, substantial trading volume, efficient clearing and settlement systems, and effective regulatory oversight. Conversely, an emerging market features a newer securities market, an evolving focus on stability and oversight, and a relatively limited but expanding array of traded securities.
International Mutual Funds. Is It Good Investment? by Inna Rosputnia
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