Investor Basics: Mutual Fund Types
The many different types of mutual funds have evolved over the years. There are domestic funds, global funds, international funds, emerging market funds, developing market funds, etc. – but what are the key similarities and differences in these fund types? This chapter of Investor Basics will aim to highlight these different types of funds to help investors make more informed choices.
Generally, domestic equity funds invest in U.S. stocks (though, if you are not based in the U.S., this might be considered an international fund!). These funds may be further broken down by market capitalization, industry, index or other criteria, but all will provide exposure to the largest and most liquid equity markets in the world.
These funds must invest in non-U.S. equities (if you are a U.S.-based investor) and may provide a source of geographic diversification for your portfolio. International funds may be defined by wide or narrow geographic constraints depending on the fund’s management charter. There are funds based on continents (such as Europe or Asia) or even specific country funds, but all would be under the larger umbrella of international funds.
Although we often use the terms “global” and “international” interchangeably, in the world of mutual funds they are very different. Global funds generally invest in international equities; however, they may also invest in U.S.-based companies as well. In effect, because they make investments in domestic companies (in some cases, funds weight U.S. holdings as a significant portion of their portfolio), your portfolio may be achieving less geographic diversification by investing in a global fund than it would from an international fund.
Emerging Markets Funds
As investors seek to diversify into various international markets, they often want to pursue opportunities with greater growth potential. Emerging markets offer opportunities for faster growth, as these newer economies are entering a faster growth phase in their development, boosted by strong demographics and population growth and upward mobility of domestic consumers. This fast growth and higher return potential may also entail greater risks, as many of these nations can have elevated political and economic instability. Some of the biggest emerging markets now include the “BRICs” nations –Brazil, Russia, India and China.
Developing Markets Funds
In developing markets, countries are generally evolving toward more developed economies, infrastructure and governments, but are still dependent on aid from trading partners as well as international governmental and non-governmental organizations. Countries such as Haiti, Bangladesh or Madagascar may be considered developing as they are often more dependent on natural resources, agriculture or lower skill manufacturing but have yet to develop strong internal markets. There are a number of mutual funds that invest in developing markets; however, many include emerging market investments in their portfolios. Another avenue to invest more directly in developing markets may be in microloans, which could be considered a hybrid investment and charitable effort.
Within each of these broad fund categories, you may find dozens, or even hundreds, of specialized portfolios based on individual countries and industries that could be used to enhance the returns and diversity in your overall portfolio.