Have you ever come across a global mutual fund or an international mutual fund and wondered if there is a difference between the two? What about a mutual fund that says, "Asia ex-Japan" or something similar? These aren't just meaningless titles made up by asset management companies—they are telling you certain things about the types of investments the fund owns.
The distinction between these two types of mutual funds is an important one, and newer investors might need to understand the basic concepts.
Understanding global vs. international mutual funds not only allows you to know what you are getting into when you invest in an out-of-the-U.S. fund, but you'll also grasp the dangers of overseas investments as well.
Global vs. International: What Not to Invest In
A leveraged global ETF sounds very lucrative until you peel the layers away and discover it is based on debt funding, with the possibility of originating in many economically developing countries.
Online automated advisers might recommend an international asset allocation that involves ordinary investors buying foreign bonds, issued by sovereign governments in developing countries.
There is no scenario where it is necessary to invest in either of these types of funds or bonds when building wealth.
What Is in a Mutual Fund Name?
Global and international mutual funds give you an idea of the scope of the geographic mandate. Several years ago, the Securities and Exchange Commission (SEC) passed legislation that requires mutual funds to invest 80% or more of the fund assets into securities that are compatible with the fund name. For example, the XYZ Long-Term Bond Fund would need to keep at least 80% of the fund's assets in long-term bonds or it would be in violation of this rule.
That means no matter how inexpensive the stock market looked or how risky investors believed long-term bonds to be, the fund managers would still be required to park the money in long-term bonds. Likewise, the ABC Utility Stock Fund would need to keep 80% of its assets invested in utility stocks.
With that said, what is the precise difference between a global mutual fund and an international mutual fund?
- A global mutual fund invests in assets around the world including the home country.
- An international mutual fund invests in assets around the world excluding the home country.
- An "ex-[country name]" mutual fund invests in a region excluding the area after the "ex". For example, a fund that is called the "XYZ Asian Stock Fund ex-Japan" would have to invest at least 80% in Asian stocks excluding Japanese stocks.
The key takeaway here is that the name of your mutual fund does matter. It has to line up with the fund's investment mandate and helps protect investors from being deceived.
This is a major improvement over past naming conventions because inexperienced investors who pick a fund for its name—such as "ABC dividend fund", now have a basic guarantee that they are getting something close to the description of the fund.
Caution Is Necessary, Even With Naming Safeguards
As it relates to this topic, naming conventions also mean you shouldn't find yourself owning an international fund that has half of its money invested in the United States and could more accurately be called a global fund or worldwide fund.
Even with the naming convention changes for funds, it is still vital that you take the time to read the mutual fund prospectus, which is the document that outlines the risks and strategies used by the portfolio manager to select investments.
A prospectus also gives you information on the fund expense ratio (the annual fee that is charged to shareholders), which is important to your success as a mutual fund investor. Additionally, you'll want to take a look at the underlying portfolio of the mutual fund in the annual report.