What is a Foreign Fund?
A foreign fund is a type of fund that invests in companies that are based internationally, or outside the investor’s country of residence. Foreign funds are also known as international funds. Foreign funds can be mutual funds, closed-end funds, or exchange-traded funds.
A foreign, or international fund, is a fund that invests in companies that are based in countries outside of where the investor lives.
A foreign fund is different from a global fund, which includes companies in the investor’s home country and abroad.
A foreign fund can refer to a mutual fund, an exchange-traded fund, or a closed-end fund.
Categorization of Foreign Fund
Foreign funds can be characterized in the following ways:
1. Based on the construction of the portfolio
Schemes for direct investment in global equities – The local portfolio manager picks high-quality overseas investment firms. Before proposing it to clients, portfolio managers need to access the track record of the scheme.
- Feeder fund – They are the funds invested in a foreign mutual fund scheme. The fund invests in a foreign fund, usually of a parent company, operated by an overseas fund manager. The performance records of the overseas fund should be looked at before the scheme is recommended.
- Fund of funds – They are also the funds invested in foreign mutual fund schemes. However, the fund will invest in several foreign funds. In the case of a fund of funds, all schemes in which the fund participates must be tested to gauge its growth potential.
2. Based on the investment portfolio
- Global funds – The funds are invested across markets and industries. Most truly, these are diversified funds.
- Sectoral or thematic funds – The funds are invested in a single asset, sector, or trend, such as real estate and gold. Investors will be exposed to uncommon themes, such as mining and agriculture, by trading in these funds.
Risks Associated With Foreign Funds
International fund investing can offer higher returns, but it can involve more risk than investing in domestic funds. As a higher-risk investment, foreign funds are generally best used as an alternative to long-term core holdings.
Some factors that can increase risk include currency and changing economies. Currency is generally a concern when investing in any type of international investment because currency volatility can affect the real returns of an investor’s portfolio.
Changing economies are also a factor and require consistent due diligence because changing regulations and legislation can affect the economic trends of international market countries.
Limitations of Foreign Fund
1. Increase in global risk
The portfolio of investors is susceptible to country-specific risks from all markets in which the foreign fund invests.
2. Currency risk
When investing abroad, currency risk is the biggest risk. Any change in the domestic currency relative to the currency of the underlying investment affects the efficiency of the system. The appreciating domestic currency adversely impacts the returns while the depreciating domestic currency raises the returns.
Debt and Equity Foreign Funds
Debt and equity funds are the two most common foreign funds. U.S. investors seeking to take more conservative bets can invest in government or corporate debt offerings from various countries outside the United States.
Equity funds offer investors diversified portfolios of stock investments that can be managed to a variety of objectives. Asset allocation funds offering a mix of debt and equity can provide for more balanced investments with the opportunity to invest in targeted regions of the world.
Benefits of Foreign Fund
1. Diversification of portfolio
Any investment portfolio can consist of a combination of large, medium, and low-risk portfolios. In a diverse portfolio, the risk associated with a single high-risk investment is spread and thus reduced. While a diverse portfolio cannot eliminate all the risks involved with a given fund, it will help to smooth the return of the portfolio at periods when the economy is uncertain or down.
2. Easy liquidity
Liquidity is an important element of any foreign fund. A liquid asset is a term used for securities whose shares can be traded for cash within a relatively limited amount of time. Once shares are traded in the exchange market, the investor will earn the balance equal to the value of the purchase at the time of the close of the market.
However, because the value of the foreign fund depends directly on the current market environment and results, the value that the investor may obtain upon withdrawal may be above or below the original cost of investing in foreign funds.
3. Expertise in portfolio management
Usually, investors do not have the expertise or experience needed to handle a complex portfolio of assets. Hence, portfolio managers are responsible for handling foreign funds. They will monitor the investments under the fund and make trading decisions on behalf of the clients.