What are International Small-Cap Mutual Funds?

International small-cap funds are mutual funds containing stocks of foreign companies that have low levels of market capitalization. Some people confuse international funds with global funds, but there is an important distinction to be made. Funds described as international, exclusively contain stocks of companies based in foreign countries, whereas global funds can contain stocks from all countries including the country the fund is housed in. Market capitalization is defined as the total value of a company's outstanding shares. The specific amounts can vary, but as of 2010, firms with a market capitalization of between $300 million US Dollars (USD) and $2 billion USD typically were classified as small-cap companies.

Mutual funds contain thousands of individual stocks in different companies, and investors experience positive returns when the values of the underlying shares increase. Shares are priced after the close of the stock market each day, because mutual fund share prices are based on stock prices. Stock prices fluctuate throughout the day, so fund prices have to be set when trading ceases. The diversity that mutual funds bring protects investors from risks associated with investing too heavily in any one company.

Investors who buy shares in international small-cap mutual funds expose themselves to higher levels of risk than people who buy large-cap funds, which contain stocks of companies with higher levels of market capitalization. Small companies have a higher failure rate than large, established companies, but they also have greater potential to grow. Investing in small-cap funds typically involves greater risks but also greater potential rewards than investing in other kinds of mutual funds.

People who are concerned about relying on the strength of their own nation's economy often invest in international small-cap funds as opposed to domestic small cap funds to give their investment holdings greater diversity. Well-diversified funds contain stocks from several continents. Many international small-cap mutual funds invest in the developing world because as economies expand, small companies have enormous potential to grow.

One of the biggest risks associated with international small-cap funds is currency risk. Fund prices are affected by the daily fluctuations in international currency exchange rates. A fund might perform well, but if the wider economy in the shareholder's country of origin causes its currency to weaken, the shareholder effectively experiences a loss.

Different investment firms sell international small-cap funds as either load or no-load shares. Load shares require the shareholder to pay a commission when buying or selling the fund. The fee is set as a certain percentage of the investment amount. No-load funds do not charge a commission but sometimes assess flat transaction fees when shares are bought or sold.