An international fund is a mutual fund that invests in stocks or securities of companies headquartered outside of the country of the investor. Smart Money Magazine and other investment publications and advisers suggest that investing in an international fund is a great way to diversify a portfolio. However, because investors may not be as familiar with foreign markets as they are with their own, there are a number of important things to keep in mind.
The advantage of investing in an international fund is that often the economies of different countries act in reverse of each other. In other words, if one economy is struggling, another may be thriving because they may be depending on different income streams. Therefore, an international fund can offer some security when a domestic fund begins to underperform. Despite this generality, there may be times when all markets underperform, such as the case with a worldwide recession or depression.
It is wise, in international investing, to always try to familiarize yourself with the investment opportunities available. Some countries may be more attractive than others. Political and economic stability are both key. For example, investing in a company headquartered in a country that is threatening to nationalize most of the assets may not be the safest, or most profitable, choice.
Any international fund falls into one of four categories. A world fund is the most diverse of the funds and invests in companies located in different portions of the world, including the United States. A foreign fund is a true international fund that can invest in companies in any country except the home country of the investor. A country-specific fund, as its name would imply, invests in companies located in a certain country. The emerging markets fund is the most risky, investing in highly volatile regions of the world that are just beginning to build their economies.
When considering mutual funds, it is wise to ask your financial adviser or investment broker to explain what companies are represented and where they are located. Choosing an international fund that has companies represented over a wide geographic area offers the most stability. This is because volatility in one region may be cushioned by other areas that remain stable. However, for those who want to risk more and have fully studied their options, an emerging markets fund may be the right choice. Like other investments, it may be good to set goals of how much to make or how much you are willing to lose before investing in an international fund that includes emerging markets.