Mutual funds offer an easy way to add international exposure and global diversification to your investment portfolio. Among other advantages, they simplify many of the issues that make investing abroad potentially difficult, including language barriers and varying regulatory, legal and tax issues.
You can choose between international, global, regional and country funds.
International funds, also known as overseas funds, invest exclusively in stock and/or bond markets outside of the United States. Investments may be made both in well established and emerging economies, offering investors balance and diversification, or the fund managers may focus on one or the other. The better-established economies offer greater stability and help counteract the volatility associated with the emerging economies, which add risk but present the potential for significant growth.
Global funds, or world funds, invest both domestically and internationally. The fund manager moves money in and out of countries depending on the current state of their economies. Global funds typically hold up to 75% of their investments in the United States, though holdings can vary widely depending upon how the U.S. economy compares to that of other countries' economies at any given time.
Regional funds focus on a specific geographic area, like Europe, Latin America or the Pacific Rim. Regional funds invest in multiple countries to limit risk if one country's investment markets begin to perform poorly. Typically, regional funds invest in a variety of small, growing economies where one country may not list enough securities to make the creation of a single country fund feasible.
Country funds concentrate investments in one overseas country and are typically closed-end funds that trade in the secondary market. Because these funds do not invest in more than one country, performance depends upon a single economy. While a period of growth could lead to considerable returns, an economic downturn could significantly damage the value of your investment. An advantage specific to country funds is that many are able to invest in countries whose markets are closed to non-citizen individual investors.
Potential investors should use caution, as some risks of international investing cannot be protected through mutual funds. These include:
- Fluctuations in exchange rates, which have the potential to reduce the value of your investment
- Changes in the political and social environment that can create economic upheaval
- The normal pattern of gains and losses that characterize all investment markets
Diversification does not assure a profit, or protect against loss, in a down market.
Investors should consider the investment objectives, risks, charges, and expenses of a mutual fund carefully before investing. A prospectus contains this and other information. A mutual fund prospectus is available through www.scottrade.com or through a Scottrade branch office. The prospectus should be read carefully before investing