What is a Foreign Fund?

A foreign fund is like a mutual fund, but it invests in stocks in a country different than the one in which the investor is living. For example, if the investor lives in America, he may invest in a foreign fund that invests in stocks primarily sold on the Asian, Japanese or London stock markets, among others. Generally, foreign funds are considered slightly riskier than large cap or mid-cap mutual funds in an investor's home country, but may provide much needed portfolio diversification to allow an investor to withstand economic trouble.

When an investor buys stock, he generally does so within the stock market of his own country. This means he invests in companies that do business and operate primarily in the country he lives in. The same is true if he buys mutual funds that invest in local stocks. This makes the investor heavily dependent on the economy of his home country; if, for example, an investor is invested 100 percent in stocks and funds of American companies and the American economy hits a rough patch, he could lose a large portion of the value of his investments.

Investing in a foreign fund allows an investor to expand his investment dollars to stocks of companies in other countries without having to individually purchase a stock on a foreign exchange. This is beneficial since the investor may not know enough about the country's business structures to wisely select a company to invest in, and he may not know how to buy shares of individual stocks on a foreign exchange.

In a foreign fund, a mutual fund adviser or other financial expert assembles money from multiple investors to buy a group of stocks — a portfolio of stocks, essentially — within a foreign market. Generally, the advisers will select a specific country or series of countries in which to invest. For example, the foreign fund may invest entirely on the Chinese market.

Often, foreign funds invest in what is referred to as emerging markets. This means stocks are purchased in companies in which the economy is likely to grow or expand rapidly. Many of the lesser developed countries and those countries that are just becoming industrialized are considered emerging markets. Emerging markets can be risky because the economy is not yet fully developed, but allow tremendous potential for growth if the economy expands and explodes rapidly within the specific target market of the funds.