You can add international flavors to your mutual fund investment menu.
By investing in more than one market, you’re in a better position to benefit from economies that are growing while others may be stalled or losing value. One way to diversify your portfolio more broadly is to buy shares in mutual funds that either focus on multinational companies that do business worldwide or invest in companies based in other countries.
While they’re often referred to generically as international funds, there are actually four specific categories of funds: international, global, regional, and country.
International and global funds
Also known as overseas funds, international funds invest exclusively in securities markets outside the United States. By investing throughout the world, the broadest of these funds balance risk and return by owning securities not only in mature, slower-growing economies but also in the more volatile economies of developing nations. Other international funds have a narrower focus, concentrating their portfolios in either mature or developing economies, in specific sectors, or on various themes, such as sustainability or infrastructure.
Global funds, also called world funds, include US stocks or bonds in their portfolios as well as those issued in other countries. The percentage invested in US securities can vary widely.
Regional funds focus on a particular geographic area, such as the Pacific Rim, Latin America, Africa, or the Middle East. These funds seek to capitalize on the growing interest in international investing and provide access to markets that may be expanding at a faster pace than developed markets. They temper some of the risk by investing in diverse though related economies.
Some funds have extended the traditional meaning of regional by grouping countries that share characteristics other than geography, such as the emerging BRIC economies: Brazil, Russia, India, and China.
The risks of investing in international funds
When you invest in international markets, your return is affected not only by how well the investments perform but also by the changing value of the US dollar in relation to the currency is which the investment is denominated, or sold.
If you buy a mutual fund that invests in European stocks issued in euros, the underlying investments will gain or lose value but the dollar will also gain or lose value in relation to the euro. There’s always a risk that the investment returns will be disappointing. But there’s at least an equal risk that changes in exchange rates will reduce or erase positive investment returns.
For example, if a mutual fund denominated in euros provides a 10% return for the year, but the euro loses 10% of its worth against the dollar, your gain is 0%. That’s because the gain in investment value is offset by the loss in currency value. But there’s also an upside.
If the investment has a 10% return and the euro appreciates 10% against the dollar, your return would be slightly more than 10% when the gain in euros is converted to dollars.
In other words, international investments are the most profitable when the dollar is weak or losing value.
Many of the other risks of investing abroad are similar to the systemic and nonsystemic risks of investing at home. One difference, especially in emerging markets, is the risk of political instability.
Country funds allow you to concentrate your investments in a single overseas country — even countries whose markets are closed to individual investors who aren’t citizens. When a fund does well, other funds tend to be set up for the same country. However, many single-country funds are closed-end funds that are traded on a stock market once they have been established.
By buying stocks and bonds in a single country, you can reap the benefits of a healthy, well-established economy, or profit from the rapid economic growth as emerging markets start to industrialize or expand their export markets. The risk of investing in a single country, however, is that a downturn in the economy can create a drag on fund performance.
Old or new funds?
While markets around the world are increasingly linked electronically, the performance of an individual market is still determined primarily by the economic and political situation at home. Among the factors that influence an investor’s experience in a particular market is whether it’s mature or emerging.
A mature market is an industrialized country with established securities markets, substantial market volume, an efficient clearing and settlement system, and an official and effective oversight agency. An emerging market has a relatively new securities market, an evolving emphasis on stability and oversight, and a limited but growing list of traded securities.
International Mutual Funds. Is It Good Investment? by Inna Rosputnia
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