One of the greatest benefits of mutual funds is that they provide the average investor with instant access to a variety of asset classes and strategies. However, despite how easy it is to diversify a portfolio using mutual funds, most investors don’t take advantage of the full spectrum of funds offered. One type of mutual fund that many investors underweight is foreign/country-specific mutual funds.
Country mutual funds, as distinct from broad-based global funds, invest primarily in the assets and securities of one country or a relatively small group of countries. For example, the ING Russia Fund (LETRX) normally invests at least 80% of its assets in Russian equities. If you are invested heavily in United States without any foreign exposure, or even if you have only concentrated on the US and EU countries, country funds can help you diversify your portfolio and spread your risk and returns around the globe.
Advantages
The most obvious advantage to investing in country mutual funds is the geographical diversification of your portfolio; by spreading the risk around, your portfolio will be somewhat protected from one country’s fiscal/monetary crisis or natural disaster. You may also have more direct access to certain types of assets since different countries often excel in different industries and have different natural resources.
In addition, many countries may have better investment opportunities compared to the United States— even Warren Buffett is searching for companies to buy in South Korea. Finally, investing in countries with a strong fiscal policy may further boost your returns if the foreign currency appreciates against the Dollar.
Disadvantages
The most challenging aspect of investing in country mutual funds is that you may be investing in a country that you know nothing about. How can you tell if Russia is a better investment than South Korea? Thankfully, there are two ways to resolve this problem: first, invest only with a mutual fund company or manager that you can trust and has a good track record, second, look for regional funds such as Eastern European Equity (VEEEX), which invests in the Eastern European region rather than one specific country.
While investing internationally may be a bit intimidating if you are unfamiliar with the global marketplace, country funds may be able to improve your portfolio’s risk-adjusted performance. By finding an investment manager you trust and taking time to learn about other countries, you will be on your way to constructing your own globally diversified portfolio.