How do I Choose the Best Global Income Fund?

Jay Way

Choosing a global income fund often takes into consideration potentially appreciating foreign currencies and rising interest rates in other countries, as well as any risks associated with international investments, especially default risk by foreign entities over which international investors might have less control. The term length on foreign income investments could also be a key factor when selecting a global income fund, because it might affect both default risk and the risk of interest-rate exposures. For any income fund, preserving the value of investment principal is as important as generating income returns, and it might be even more so when investing in foreign markets.

Appreciation of foreign currencies and foreign interest rates are often considered when choosing a global income fund.
Appreciation of foreign currencies and foreign interest rates are often considered when choosing a global income fund.

Foreign exchange rates are a major concern for any portfolio diversification that consists of international investments. A global income fund that invests in foreign-currency-denominated income securities can generate extra returns when foreign currencies have appreciated against domestic currency by the time investments are measured and transferred back in domestic currency. Timing in international investments can be critical with regard to moves in foreign exchange rates. In a domestic currency downtrend, the sooner a foreign investment is made, the better it is for future returns.

Appreciating foreign currencies are often the result of rising foreign interest rates. A global income fund that invests in countries that have seen hikes in interest rates by their central banks has a better chance of earning higher returns than investing in places whose economies call for continued low-rate stimulus. Economic analysis is a key to successfully sifting investment money on a global basis. When choosing a global income fund, potential fund investors should investigate whether its management possesses in-depth global economic knowledge and has a satisfactory track record of historical performance in international investments.

A global income fund that buys primarily foreign government securities will have less risk than those investing heavily in foreign private sectors that are more likely to pose higher potential default risks. When in a default situation, international investors might have less control over their recourse. Investing in shorter-term securities can help better manage such credit risk, because the longer a security matures, the more risk it presents.

Shorter-term securities can also help hedge future interest rate increases, which tends to happen in counties that promote rate hikes in a growing economy. As interest rates rise, prices of fixed-income securities will decline, with longer-term securities falling more than shorter-term securities. Securities with their maturities on the short end often see very little price decline in times of rising interest rates, which helps preserve investment principal. Selling a fund's holdings prior to maturity might prove to be necessary sometimes when foreign market conditions change.

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