What to Look for When Investing in International Funds
1. Investment Objective
Investment objectives are critical in evaluating any mutual fund. You should determine whether the fund is suitable for your financial goals and the risks associated with those objectives. It is important to choose international funds that align with your investment objectives. For instance, if you are looking to invest for the long-term, you should choose international funds that invest in companies with long-term growth potential.
2. Performance
Performance is a critical factor to consider when investing in mutual funds. Before investing in any international fund, take a closer look at its performance record by examining the returns for the last three to five years. Additionally, compare the fund’s performance record to the industry average and benchmark to determine if it is outperforming or underperforming other funds in its category.
3. Risk
As an investor, you should be well-versed in the risks involved in investing in international funds. Before investing, examine the fund prospectus to ascertain the risks. International funds are inherently riskier than domestic funds due to currency fluctuations, political instability, and foreign market risks. Ensure that you are comfortable with the risks associated with the fund you are considering.
4. Expenses
Investment expenses can eat into your returns, so it's essential to consider the fund's expense ratio before investing. The expense ratio includes management fees, shareholder fees, and any other costs associated with running the fund. Look for international funds with low expense ratios to maximize your returns.
5. Asset Allocation
Asset allocation determines where your money will be invested by the fund manager. Different asset allocations will offer different risk-reward profiles, so it's essential to choose an allocation that aligns with your investment objectives. If you are looking for a relatively conservative fund, look for international bond funds, which invest in foreign government and corporate bonds.
6. Manager
A talented fund manager could significantly impact a fund’s returns. Before investing in an international fund, take a closer look at the fund manager's experience, education, and track record. Study the manager’s investment approach and philosophy to determine how suitable it is for your investment objectives.
7. Diversification
A well-diversified portfolio minimizes risk and maximizes returns. Before investing in an international fund, examine the fund’s holdings to ascertain its diversification level. Diversified international funds invest in different industries and sectors and reduce your exposure to a single geographic region or industry.
8. Taxation
International funds have different tax implications than domestic funds as they are subject to foreign taxation. Additionally, dividends from international funds may be taxed at a higher rate than domestic funds. It is essential to consider the tax implications of investing in international funds to determine if it is the right investment for you.
9. Currency Risk
Investing in international funds exposes you to currency risk, meaning that the fund’s returns can be negatively impacted by fluctuations in foreign currency exchange rates. Before investing in any international fund, evaluate the potential impact of currency risk on the fund’s performance.
Conclusion
Investing in international funds can be a lucrative way to diversify your portfolio. However, you must evaluate each fund’s investment objective, performance, risk, expenses, asset allocation, manager, diversification, taxation, and currency risk before investing. Remember, choosing the right international fund can impact your investment goals.