When it comes to minimizing the risk of investment, diversification is the strategy most commonly brought up and used. Diversifying is a highly individual method, but when making your decisions, be sure to expand your view beyond the borders of the United States. With international stock markets accounting for about 44 percent of the world’s capitalization, a broad range of investment opportunities exist outside the U.S.1
There are two common investment opportunities that exist outside of the United States: international mutual funds and global mutual funds. But what’s the difference between the two?
To make the best choice for your portfolio, it’s important to understand your investment options as thoroughly as possible, which begins with breaking down the definition, advantages and disadvantages of international and global mutual funds.
International mutual funds invest only in markets outside the United States. For investors, the biggest advantage an international fund provides is its ability to control the allocation of national and global stocks.
This control allows investors in international funds to keep their investments in U.S. markets separated from their investments in non-U.S. markets. This allows greater control of their overall investment portfolio and a stronger diversification, as opposed to global funds which provide no separation.
Global mutual funds invest in global stock markets without excluding U.S.-based stocks. One major advantage of this option is its ability to capitalize on the shifts in relative opportunities these markets may present at any given moment.
However, by consolidating into one fund, investors have reduced visibility and control over their overall portfolio’s separation between domestic and international stocks.
Advantages and Disadvantages
While one investment option might immediately sound more appealing than the other, it is important to be aware of some of the pros and cons that both international mutual funds and global mutual funds possess.
Depending on how a global fund is managed, and whether an investor has other investments, choosing a global fund could cause overlapping in the domestic market and less diversification.
For example, an individual investor could have stock in a domestic company, then decide to invest in a global fund in order to access global markets. This fund may then choose to invest in the same stock the investor already owns. This, in turn, limits diversification, which may be one of the reasons for investing in a global mutual fund in the first place.
Such an investor may opt for an international fund in place of a global fund to reduce the chances of their investments overlapping while still gaining access to international markets.
With this in mind, it’s important to remember that asset allocation is an approach to help manage investment risk and is not a guarantee against investment loss.
Investors should also be aware of their chosen fund’s approach to the inherent currency risks of both international and global funds. Some funds choose to engage in strategies that attempt to mitigate the effects of currency fluctuations, while others consider currency movements – up and down – to be an element of portfolio performance.
It is also extremely important to be aware that both global mutual funds and international mutual funds may face different taxes depending on the location of the fund. For example, mutual funds located outside of the United States could be considered a Passive Foreign Investment Company, which processes taxes under a different set of rules than U.S.-based funds, whether international or global.2
The nuances of investing in non-U.S. markets can be difficult for the average investor to understand, not to mention involving a time-consuming amount of research. By using a mutual fund, you are entrusting your investment to a professional. Such professionals have the support and knowledge to properly understand these global markets, and as an added benefit, mutual funds often cost less when compared to direct investments.3
Whether an international mutual fund or a global mutual fund is the best option for you depends on your unique financial circumstances. Always consult with your financial advisor before making any investment decisions, and be sure to understand the advantages and disadvantages of all of your investments.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.