The Risks and Rewards of International Mutual Funds

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International funds add diversity to your portfolio and enable you to access markets from around the globe for returns. However, you must understand their risks.

Remember that any returns from investments you make are subject to taxes depending on which tax bracket you fall into.

Developed Market Funds

Developed markets form the cornerstone of global investing. Their attractive investment returns include superior infrastructure, more developed capital markets, and higher living standards. An allocation to developed markets provides portfolio stability, transparency, and liquidity.

Investing in developed market equity funds offers investors access to companies worldwide with various business models, industries,, and growth prospects. Additionally, these low-cost options give diversified exposure to some of the world’s advanced economies.

These funds offer investors an effective way to diversify their international holdings by giving them access to an array of domestic and foreign mid-and small-cap stocks, both domestic and foreign. These investments tend to focus on companies with diverse businesses to produce strong risk-adjusted returns with reduced volatility.

Index funds follow an established global market benchmark. They invest all or substantially all their assets in stocks comprising this index and weight them by market capitalization or employ other strategies designed to mimic its performance, such as buying and selling securities on an ongoing basis or even using leverage.

Before investing, investors should carefully evaluate a fund’s investment objective, strategy, risks, and expenses detailed in its prospectus. You can access this document online or from your Schwab account representative.

Schwab International Equity funds employ a proven bottom-up fundamental research process to identify well-positioned large, mid, and small-cap stocks with long-term capital appreciation potential. They aim to achieve risk-adjusted solid outperformance across different market environments while producing stable income returns.

Investments in foreign market funds entail additional risks, including currency fluctuations, political and social unrest, limited regulatory oversight, and the possibility of illiquid markets. The Funds are distributed by a wholly owned subsidiary of The Charles Schwab Corporation and do not qualify for FDIC insurance protection; these statements provide only an overview of them and should not be seen as replacement documents required under U.S. federal law.

Country-Specific Funds

Country funds specialize in investing in one particular country’s stock market. They can be an ideal addition to an international portfolio if you want exposure to countries experiencing rapid economic development and strong finances yet remain stable financially and with solid economic fundamentals. Unfortunately, they tend to experience more volatile stock prices and investment returns due to being focused so closely on one specific nation’s market; additionally, some may not provide enough liquidity so you can quickly exit positions if required.

Funds that meet this description can usually be found through most U.S. brokers and are typically classified as mutual or exchange-traded funds. Their management company (sometimes referred to as a fund management company ) trades the funds on behalf of investors according to its objective. It is overseen by either its board of directors if organized as a corporation or trust, respectively.

Managers of country funds use original research to select stocks and countries with high potential growth potential, then make high-conviction country overweights or underweights for their portfolios. This approach has proven successful at producing competitive returns compared to broad, regional, or even global equity funds that don’t utilize this strategy.

Foreign markets present unique investing risks, including political unrest and fluctuating currencies. When investing in emerging or developing economies with less-regulated economies and markets, these risk factors can become even more significant; choosing an excellent country fund can help mitigate these risks and boost your long-term success.

No matter which international fund you select, it is critical to understand how fees affect your returns. Each fund has an expense ratio fee that covers its administrative and operating costs, generally charged annually. When purchasing shares of the fund through a broker, an upfront load or sales charge may also apply – its amount usually decreases with additional investments at set breakpoints often tied to minimum initial investment levels.

Thematic Funds

Thematic funds enable investors to build portfolios around specific themes rather than investing across sectors or market caps. For instance, an electric vehicle-themed fund might invest in companies producing electric vehicle components or developing technologies to increase the efficiency of EVs. While thematic investments may offer potentially good returns in the short term, their risks may change over time, making long-term investing the optimal strategy.

However, before investing in thematic mutual funds, you must research and choose the appropriate one. Furthermore, you must understand how these funds are taxed: short-term capital gain taxed at 15% will apply regardless of your income tax slab, whereas if held longer than 12 months, this gain would be treated as long-term capital gain and taxed accordingly.

These funds offer investors looking to diversify their portfolio with specific themes an ideal option, yet investors should remember they may lose value should their piece not take hold. They are also more volatile than other equity funds.

Thematic funds often carry higher fees than equity funds, which may reduce returns. But with intelligent portfolio management and thorough research into investing thematic funds, they can be an excellent way to build wealth.

Chris Versace, Morningstar FundInvestor’s Director of Research, joins Ed in discussing what differentiates thematic funds from sectors, how they may fit in an investor’s portfolio, and some long-term trends he’s keeping an eye on. You can listen to this episode on Apple Podcasts, Spotify, Stitcher, SoundCloud, or YouTube.

Global Funds

Investment in global funds offers the opportunity to diversify your portfolio by investing in countries and markets all around the globe. However, like any investment vehicle, international funds carry risks and rewards; selecting an appropriate global fund depends on an investor’s risk tolerance, investment time horizon, and asset allocation goals.

There are various kinds of global funds, from country or region-specific to thematic funds. At the same time, domestically focused global funds may offer greater diversity than international ones, investing in both emerging and developed markets.

Global funds may either be passive or active. Passive international funds do not involve active management; instead, they follow the performance of markets they invest in passively and tend to be cheaper than active funds; however, their returns are limited by overall market performance and may only provide limited returns for investors who use passive global funds as part of their ISA or SIPP investment strategy.

Global funds focusing on middle-income countries (MICs), or “MICs,” often drive economic growth and host a rapidly expanding middle class while drawing increasing amounts of foreign investment. Yet these countries face many significant obstacles, including limited infrastructure access and financial markets – two key concerns facing any global fund investor. At the same time, certain international funds specialize in areas like energy or technology investing, while others offer diversified portfolios of global stocks as investment options.

If you already own stocks in domestic companies, investing in global funds may provide an effective means of diversification. Markets in different countries tend to fluctuate independently from domestic ones; owning shares across various markets can reduce volatility within your portfolio. It’s essential to do your research before making a decision and assess both risks and returns before selecting.