Many investors are familiar with the term diversification. Diversification is a well-known strategy used to help reduce the risk of investment. And with international stock markets accounting for about 44 percent of the world’s capitalization, a broad range of investment opportunities exist outside the borders of the U.S.1
Many investors are not aware of this, but there are two common investment opportunities that exist outside of the United States including international mutual funds and global mutual funds. Although both are mutual funds, there is still a difference between the two investment opportunities.
Below we look at the difference between the two investment opportunities as we discuss each fund’s definition, as well as advantages and disadvantages of each. Continue reading as we will also break down how international and global mutual funds work to help you better understand your investment options.
International mutual funds only invest in markets outside the United States. One of the biggest advantages that international funds provide for investors is its ability to control the allocation of national and global stocks.
This control is crucial as it allows investors in international funds to separate investments in U.S. markets from investments in non-U.S. markets, which results in greater control of their overall investment portfolio. This is different from global funds which provide no separation.
Global mutual funds invest in global stock markets without excluding U.S.-based stocks. One of the major advantages of creating a global mutual fund is it's ability to control created by a global mutual fund 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
Both international mutual funds and global mutual funds each have some advantages and disadvantage. Below we discuss the pros and cons of both investment options that investors should be aware of.
Depending on how a global fund is managed, and whether an investor has other investments, there could be overlaps in domestic markets.
For example, an individual investor could have stock in a domestic company, then choose to invest in a global fund to access global markets. This fund may then choose to invest in the same stock the investor already owns. As a result, this 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 instead of a global fund to reduce the chance of overlap while still accessing international markets. It is important to know 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 international and global funds. Some funds choose to engage in strategies that may mitigate the effects of currency fluctuations, while others consider currency movements – up and down – to be an element of portfolio performance.
Knowing the tax implications of both investment options is very important for investors. Depending on the location of the fund, both global mutual funds as well as international mutual funds may have tax implications. 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, when compared to U.S.-based international or global funds.2
The nuances of non-U.S. markets can be difficult for average investors to understand, let alone time-consuming. However, by using a mutual fund, you are entrusting your investment with a professional. Such professionals have the support and knowledge to properly understand these global markets, and mutual funds often cost less when compared to direct investments.3
Whether an international mutual fund or a global mutual fund is the best opportunity for you depends on your unique financial circumstances. It's always a good idea talk with your financial advisor before making any investment decisions, as they can help you 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.