DEFINITION of Foreign Fund
A foreign fund is a fund that invests in companies outside the investor’s country of residence. Foreign funds can be mutual funds, closed-end funds or exchange-traded funds. They are also known as international funds.
BREAKING DOWN Foreign Fund
Foreign funds offer individual investors access to international markets. International investing poses risks, but it can also help investors diversify their portfolios. International funds can help investors broaden their investment horizons, resulting in higher potential for return. For U.S. investors, international funds can include developed, emerging or frontier market investments. Investing in these markets can offer higher return potential and diversification, but they can also increase risk.
Risks Associated With Foreign Funds
International fund investing can offer higher returns, but it usually also comes with more risk. As a higher-risk investment, it is 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.
Foreign Funds vs. Global Funds
Foreign funds consist of securities from all countries except the investor's home country. These funds provide diversification outside the investor's domestic investments. If an investor currently holds a portfolio consisting mainly of domestic investments, he or she may choose to diversify against country-specific risk and purchase an international fund.
Global funds consist of securities in all parts of the world, including the country in which the investor resides. Global funds are chosen primarily by investors who wish to diversify against country-specific risk without excluding their own country. Such investors may already have a lower-than-desired concentration of domestic investments or may not want to take on the high level of sovereign risk involved in making foreign investments.
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 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.