What Is A Global Fund?

What is a global fund? A global fund is a fund that invests in both U.S. and foreign securities. According to the Mutual Fund Education Alliance and its managing director Michelle Smith, a global fund is...

According to the Mutual Fund Education Alliance and its managing director Michelle Smith, a global fund is "A fund that invests in both U.S. and foreign securities." Sometimes global is mixed in with an international fund, which is "A fund that invests in securities traded in markets outside the United States," according to Smith and the MFEA.

When looking to add global or international funds to your portfolio, it is important to do some extra research. While global and international funds add diversity to a portfolio, extra risk exists because of currency fluctuations. Economic and political instability, as well as natural disasters may cause problems. Increasingly, our society is becoming more global and it makes sense to have access to some of the best companies in the world.

One advantage to global and international funds is the enormous economic growth occurring worldwide. Stock markets in other countries move differently than U.S. markets, giving you a handle to minimize risk. Half of the investment opportunities that exist are outside the United States. Many times, foreign markets move in different directions from U.S. markets. If you are interested in companies such as Toyota, Nestle and Bayer Group, they are foreign companies and so you will need to look into international funds.

Unless you are an experienced investor, using a global or international mutual fund is the best way to dive into foreign securities. Every country has their own investment practices that differ widely from the United States and each other. An experienced manager will be more familiar with how political and economic events could potentially affect their securities. In addition, the fund's manager or board is able to handle the time difference, cultural factors, recordkeeping and other matters that differ for a foreign country.

When looking into investing in global funds specifically, pay attention to the annual reports and prospectus. Many global funds include a large percentage of U.S. large-cap domestic stocks. Almost half of the global funds tracked by Morningstar invest at least 40% of their assets in U.S. stocks. So if you have mutual funds that are domestic, your portfolio may be too heavily weighted towards certain stocks. If several of those larger companies experience problems, it will have an extra impact on your investments.

Another note about global or international funds is the fees. Not surprising, it costs more to manage money in other countries. There are conversion fees and taxes may be more in some cases. Therefore, if your portfolio has domestic stocks in global funds, you may be paying twice as much as you should. Expenses in overseas fund may go even higher if the fund is hedging against the currency being devalued. Because of this, any short-term investments will be hit more frequently than if you are holding for the long-term.

Global and international funds, according to Smith and the MFEA are "are considered to be aggressive growth funds or growth funds, investors must be willing to assume the risk of potential loss in value in the hope of achieving substantial gains. They are not suitable for investors who must conserve their principal or maximize current income."

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