Are Country Mutual Funds Worth the Risk?

You may wonder if country mutual funds are worth the risk when other attractive options are available. A common perception is that international investing is inherently risky and should be reserved for those with big risk appetites. The reality is, however, that with the introduction of country specific mutual funds, you can deploy capital into foreign stocks with less difficulty. The risks still exist, but you face fewer logistical issues. As with any asset class, there are advantages and disadvantages, and you should only invest a portion of your assets if you understand the risks.

What is a Country Mutual Fund?

A country specific mutual fund is one in which the manager selects securities from a specific country in an attempt to mirror or outperform the prevailing stock index in that country. Each of these funds is different, so you should conduct your own research to be sure you are purchasing shares in a fund with which you are comfortable. Some funds may invest in futures contracts on the index in question, while others will make specific stock selections. The goal for any of these funds is to mirror the performance of the companies in that country.

Some of these funds will track the companies in developed countries, while other will track emerging market countries. In either case, the advantages and the risks differ depending on the country’s stability. You need to pay attention to which country you are investing in as the factors that affect each are different.

Advantages

The primary advantage to investing in a country fund is that the stock markets of different countries are often uncorrelated with the U.S. market. Investing is diverse, uncorrelated assets gives you the best long-term results because different assets classes will do well at different times. The added risk that you accept by investing in these countries can lead to larger gains.

Disadvantages

The drawback to investing abroad is that some of the factors that affect the success of your investment are difficult to understand, or predict. Political unrest can lead to your losing a position in a particular country. Losses can also be created by the relationship between the multiple countries, or by large shifts in the currencies in play. While you receive some protection investing in a country fund, some of these risks are hard to escape. As with any investment, you need to determine your risk tolerance and then make an allocation appropriately. This will often lead to some exposure, but exposure that you have limited.

An Example – A BRIC Fund

In 2006, many asset managers identified Brazil, Russia, India and China as the best collection of nations to invest in. Around the same time, many firms launched BRIC funds to tracks these companies. Most have tripled in value since they were launched. These funds are somewhat more diversified that single country funds, but demonstrate the kind of returns that you may achieve. The risks are real, however, and thorough research should be performed before investing.

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