Global Investment Funds: Three Key Sources Explained

Global funds, international funds, and domestic funds are the three sources of global investment funds. Global funds invest in companies worldwide, including the investor's home country. International funds, on the other hand, invest in all countries except the investor's home country. Domestic funds primarily invest in companies within the US. Global funds are ideal for investors seeking to diversify their portfolios and reduce country-specific risks. International funds provide diversification outside of an investor's domestic investments, while domestic funds focus on US companies.

Global funds vs international funds

Global funds and international funds are two types of investment funds with distinct characteristics and objectives. Understanding the differences between these two options is crucial for investors looking to diversify their portfolios and access opportunities beyond their domestic market. Here is an in-depth comparison of global funds vs international funds:

Definition and Scope:

Global funds are investment funds that seek to identify and invest in the best opportunities from a global universe of securities. They consist of securities from all parts of the world, including the investor's home country. Global funds offer investors exposure to a diverse range of companies and markets, both domestically and internationally.

On the other hand, international funds focus solely on securities from countries outside the investor's home country. These funds provide investors with a way to diversify their portfolios by accessing companies and markets beyond their domestic borders.

Investor Considerations:

When deciding between global and international funds, investors should consider their existing portfolio composition and their risk tolerance. If an investor already has significant domestic investments, they may prefer an international fund to broaden their exposure. Global funds, on the other hand, can provide a mix of domestic and foreign investments, reducing the risk of over-exposure to a single market.

Additionally, the level of country-specific risk and regulatory differences should be considered. Global funds offer a hedge against country-specific risks, as a downturn in one market may be offset by positive performance in another. However, investors should be aware that different countries have varying levels of market regulation, which can impact the protection offered to investments.

Investment Strategy:

The investment strategy of global funds is to identify top-performing investments across the globe, including in the investor's home country. This approach can provide a balance between domestic and foreign exposure, allowing investors to capitalise on opportunities in their own market while also accessing international ones.

International funds, by excluding the investor's home country, offer a more targeted strategy for those seeking pure international exposure. These funds can be useful for investors who want to take advantage of anticipated growth in specific foreign markets or who wish to diversify their portfolios by investing in developed or emerging markets outside their home country.

Risk Management:

Both global and international funds carry risks, including currency fluctuations, economic shifts, and political or regulatory changes. However, global funds may offer some risk mitigation by spreading investments across multiple countries. If one country experiences negative market movements, investments in other countries may counterbalance these losses.

International funds, by their nature, carry the risk of being more susceptible to the performance of a single country or market. A downturn in the specific international market an investor has targeted could lead to greater losses.

In conclusion, global funds and international funds offer distinct advantages and considerations for investors. Global funds provide a mix of domestic and foreign exposure, helping to diversify portfolios and reduce country-specific risks. International funds, on the other hand, offer pure international exposure, allowing investors to access opportunities outside their home country and diversify their portfolios on a global scale. The choice between the two depends on the investor's existing portfolio, risk tolerance, and investment goals.

Diversification of portfolios

Global funds are a great way to diversify an investor's portfolio. Diversification is a key strategy to manage risk and maximise returns. By investing in a global fund, investors can gain exposure to a wide range of securities from all over the world, including their own country. This means that investors can access the returns of international securities while mitigating some of the risks and fears associated with international investments.

Global funds can be actively or passively managed. Actively managed global funds are a popular choice for investors, but passively managed index funds can also provide broad market exposure with diversification benefits. Global funds can be focused on a single asset class or allocated to multiple asset classes. They can be offered as closed-end mutual funds, open-end mutual funds, or exchange-traded funds (ETFs).

Global funds can be further categorised into two types: those that invest directly, and those that invest indirectly. Directly invested funds are managed by a local fund manager who directly invests the funds and handles the portfolio. Indirectly invested funds are either feeder funds, where the fund house collects money from investors and transfers it to an offshore fund house, or fund of funds, where the investor's money is invested in a collection of foreign funds.

Global funds can also be classified based on their investment preferences. Regional funds invest in specific regions or countries, while truly global funds have no regional or country preferences and invest all around the world. Some global funds also invest based on specific themes or sectors, such as energy or commodities.

The main benefits of global funds are their ability to provide diversification, insulate investors from market fluctuations in their own country, and offer the opportunity to invest in the fastest-growing markets in the world. However, there are also risks involved, such as currency exchange rate fluctuations and exposure to geopolitical and socio-economic factors.

Risk management

Diversification

A core benefit of global investment funds is the ability to diversify an investment portfolio across multiple countries and regions. This diversification can help to reduce the impact of country-specific or market-specific risks. For example, negative news in one country may drive that market down, but positive performance in other countries can offset this impact.

Market and Country Risk

When investing in global funds, it is crucial to assess the market conditions and macroeconomic factors of each country in the portfolio. Investors should consider factors such as economic stability, regulatory environment, and political climate, as these can influence the performance of their investments. For instance, a country with a strong and stable economy is likely to provide a more favourable investment environment than one with weak finances.

Currency Risk

Currency fluctuations can significantly impact the performance of global investment funds. Changes in exchange rates between countries' currencies and the base currency (e.g., the US dollar) can affect the value of investments. While currency appreciation can enhance returns, depreciation can hurt portfolio performance.

Regulatory and Information Risks

Not all countries regulate their markets to the same standard as others. Some countries may have less stringent regulations or unexpected government interventions, which can affect investments. Additionally, information availability and transparency may vary across countries, making it challenging for investors to make fully informed decisions.

Volatility and Liquidity

Emerging or developing markets often offer higher returns but also carry greater risk due to less regulated markets and economies. These markets may exhibit higher volatility, and certain securities may have reduced liquidity, making it challenging to buy or sell them promptly.

Tax Implications

Global investment funds are typically taxed as non-equity funds. In many jurisdictions, gains from the sale of units within a specified period (often three years) are taxed as regular income, while gains realised after this period may qualify for reduced tax rates or indexation benefits.

In summary, while global investment funds offer the advantage of diversification and access to international markets, investors must carefully consider and manage various risks. These include market and country-specific risks, currency fluctuations, regulatory differences, volatility, liquidity constraints, and tax implications. By actively addressing these factors, investors can make more informed decisions and better manage the risks associated with global investment funds.

Tax implications

Global funds and international funds are treated differently for tax purposes. All mutual funds that invest primarily in foreign markets are considered non-equity funds for tax purposes. Therefore, international funds are taxed as non-equity funds.

If you sell the units of a global fund within three years of the purchase date, the gains are added to your taxable income and taxed according to the relevant tax slab. However, if you sell the units after three years from the purchase date, the gains are taxed at 20% with indexation benefits. In contrast, gains from international funds are taxed at the marginal rate if sold within three years of the purchase date. After three years, the gains are eligible for indexation benefits (20% with indexation and 10% without).

It is important to note that the tax treatment of global and international funds may vary depending on the country and specific tax regulations. Investors should consult with tax professionals to understand the specific tax implications of their investments.

When investing in global funds, currency risk is an important consideration. Changes in currency exchange rates can impact the value of an investment. For example, a decline in the value of the US dollar relative to other currencies can increase the returns on foreign stocks. On the other hand, if the dollar's value rises, it can reduce the returns. Therefore, investors in global funds need to carefully monitor currency movements and their potential impact on investment returns.

Additionally, the stability of a country's economic and political climate plays a crucial role in investment risk. A country with stable finances and a robust economy typically provides a more favourable investment environment than a country with weaker finances or an unstable economy. Political risk refers to the ability of a country to maintain a favourable climate for outside investment. Even if a country has a strong economy, an unfriendly political climate can increase the risk for investors.

Investment options

Global funds are a type of mutual fund or ETF that provides investors with access to a diversified portfolio of global investments. They seek to identify the best investments from a wide range of securities across multiple countries and asset classes. This diversification can help to mitigate some of the risks associated with international investing, such as country-specific risk and sovereign risk. Global funds can be particularly attractive to investors who already have a high concentration of domestic investments or wish to avoid the high levels of risk involved in solely foreign investments.

Global funds can be actively or passively managed and are typically offered as closed-end, open-end, or exchange-traded funds. They can be focused on a single asset class or allocated to multiple asset classes. They may also be structured in different ways, depending on the region of investment and the mode of investment. For example, they can be regional funds, which invest in specific countries or areas, or they can be truly global funds, which have no regional preferences and invest across the world.

Another key distinction is between global funds and international funds. International funds consist of securities from all countries except the investor's home country, whereas global funds include the investor's home country in their portfolio. This means that global funds can provide some domestic exposure, which can be advantageous if the global economy is performing well.

Global funds can be an important part of a diversified portfolio, offering multiple layers of diversification, including geographical, currency, and sector diversification. This can reduce the chances that the performance of a single stock or instability in one country will negatively impact the entire portfolio.

There are several advantages to investing in global funds. Firstly, they offer the potential for greater capital appreciation than domestic funds, as they can invest in some of the largest and fastest-growing economies in the world. This growth potential can be beneficial for those saving for retirement or other long-term goals, helping their savings keep pace with inflation. Secondly, global funds provide access to a broader variety of income sources compared to investing solely in domestic stocks. Thirdly, global funds benefit from professional management, with portfolio managers and analysts utilising their expertise, technology, global reach, and language skills to research companies and analyse market information before making investment decisions.

However, it is important to consider the risks associated with global funds. As with any investment, international investing carries risks, including currency risk, changes to economic, political, or regulatory conditions, and less regulated markets in emerging or developing countries. These factors can lead to greater volatility in stock prices and fund performance. Additionally, investing in foreign markets may require making decisions based on less complete information, as these markets are not as widely followed by financial analysts.

Some examples of global funds include the Vanguard Total International Bond Index Fund (VTABX) and the American Funds New Perspective Fund (ANWPX).

Frequently asked questions