Diversification is a well-known strategy 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
Two common investment opportunities that exist outside of the United States include international mutual funds and global mutual funds. But what’s the difference between the two?
Looking at each fund’s definition, advantages and disadvantages, we’ll 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. 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 separate investments in U.S. markets from investments in non-U.S. markets, giving greater control of their overall investment portfolio, as opposed to global funds which provide no separation.
Global mutual funds invest in global stock markets without excluding U.S.-based stocks. One advantage 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
International mutual funds and global mutual funds each have some pros and cons 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. 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 chance of overlap while still accessing international markets. With this in mind, it’s 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.
Also, it’s 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, 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. 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 will work 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.