When added to a well-rounded portfolio, international bonds present an opportunity to achieve lower risk-adjusted earnings than what the global equity markets typically provide. Exposure to global debt securities is attractive to investors wanting to diversify fixed income positions held in the domestic market with bonds issued by foreign entities. 

Within international bond mutual funds, managers select certain global debt positions with varying maturity dates, country exposure, and overall default risk exposure to reduce the potential for loss within a portfolio while attempting to earn a modest return. Investors who want to participate in the international bond market through mutual funds should understand the risks by reviewing the current prospectus for the below funds, which have been the favorites among investors in 2020.

1. PIMCO International Bond Fund (PFORX)

The PIMCO International Bond Fund seeks to provide investors with maximum total return through the preservation of capital and prudent investment management of a portfolio of fixed income securities. The fund's managers invest at least 80% of fund assets in fixed income holdings that have economic ties to foreign countries. The majority of investments made within the mutual fund include investment grade securities, although fund managers have the flexibility to invest up to 10% of investor assets in junk bonds with B ratings or higher. With an inception date of 1997, the fund has net assets of $12.4 billion as of Feb. 29, 2020 and a 10-year annualized return of 5.14%.

The fund currently diversifies its holdings across a wide range of countries, including the United Kingdom, Japan, Italy, Spain, China, Denmark, South Korea, France, Canada, and Australia. The fund has an adjusted expense ratio of 0.50% and an effective maturity of 10.76 years.

2. PIMCO Emerging Markets Local Currency and Bond Fund (PELBX)

The Pimco Emerging Markets Local Currency and Bond Fund seeks high-yield and currency appreciation by actively managing a portfolio of local currency denominated debt in emerging market locations. The primary investment assets are the government bonds of emerging market countries. Pimco believes this fund adds portfolio diversification as emerging market debt has had a low correlation with standard fixed-income assets, such as U.S. Treasuries.

The fund began trading in 2006, has net assets of $1.8 billion as of Feb. 29, 2020, and a 10-year average annual return of 2.53%. The top 10 currency exposures in the fund are Brazil, Mexico, Indonesia, Russia, Thailand, U.S., Poland, South Africa, Malaysia, and Colombia. The effective maturity of holdings is 8.96 years. The fund has an adjusted expense ratio of 0.90%.

3. Goldman Sachs Emerging Markets Debt Fund (GSDIX)

The Goldman Sachs Emerging Markets Debt Fund seeks high levels of total return by investing its assets into the debt of emerging market countries, with the bulk of concentrations in Latin America (30.4%), Middle East/Africa (26.3%), Central and Eastern Europe (18.1%), and Asia (16.4%). The top countries include Mexico, Indonesia, Turkey, Ukraine, and Egypt. 75% of the debt holdings range from B to BBB rated.

The fund started in 2003 and as of Feb. 29, 2020, the fund has net assets of $1.6 billion, a 10-year average annual return of 6.47%. The fund has a net expense ratio of 0.85%.

4. T. Rowe Institutional Emerging Markets Bond Fund (PRSNX)

The T. Rowe Institutional Emerging Markets Bond Fund is a riskier fund whose investments may include the lowest-rated bonds, some of which may be in default. There is more volatility in these bonds due to the instability of the political landscape in the emerging market countries

The fund's managers invest in a variety of securities, including futures, swaps, and other derivatives. The fund's net assets as of Feb. 29, 2020, was $492 million, with a 10-year average annual return of 6.44%. The fund primarily invests in corporate and sovereign debt. Country exposure includes Mexico, Ukraine, Turkey, Egypt, Serbia, Argentina, and Peru. The fund has an expense ratio of 0.70%.

5. GMO Emerging Country Debt Fund (GMCDX)

The GMO Emerging Country Debt Fund has an objective of achieving total return in excess of its benchmark, which is the J.P. Morgan Emerging Markets Bond Index Global Diversified. The main investments are that of sovereign debt. The goal is to focus on bottom-up issue selection, to find debt that has similar characteristics to the J.P. index but with better long-term total return prospects.

The fund began trading in 1995 and as of Jan. 31, 2020, has a net asset value of $4.4 billion with a 10-year return of 9.30%. The fund has exposure to almost 80 countries globally with the bulk of investments above investment grade. The expense ratio is 0.54% and the minimum investment is $5 million.