Have you ever come across a global or an international mutual fund and wondered how the two differ. What about a mutual fund that is called, "Asia ex-Japan" or similar? These aren't just trite titles made up by asset management firms. They are telling you certain things about the types of investments the fund owns.
The contrast between these two types of funds matters. If you are a newer investor, you need to be sure you grasp the basic concept of each.
Understanding global vs. international mutual funds not only allows you to know what you are getting into when you invest in a fund that is not based out of the U.S., but you'll also grasp the risks of these 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 find out that it is based on debt funding. These ETFs may also originate in a country that is still developing economically.
Online robo advisers might suggest that you allocate some of your assets to a global fund that involves ordinary investors buying foreign bonds, issued by sovereign governments in developing countries, but if you're newer to investing and risk adverse, this might not be the place to put your money.
There is no point where you should or must invest in either of these types of funds or bonds when you are building your wealth. These would be better left to the experts in most cases.
What Is in a Mutual Fund Name?
Global and international funds give you an idea of the scope of the geographic mandate. A few years ago, the Securities and Exchange Commission (SEC) passed a law that requires mutual funds to invest 80% or more of the fund assets into securities that match 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 long-term bonds were thought to be, the fund managers would still have 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, you should still know the precise difference between a global fund and an international fund. The key ways these two mutual funds differ include:
- A global fund invests in assets around the world including the home country.
- An international fund invests in assets around the world but not the home country.
- An "ex-[country name]" fund invests in a region that excludes the area after the "ex." For instance, a fund that is called the "XYZ Asian Stock Fund ex-Japan" would have to invest at least 80% in Asian stocks, but not Japanese stocks.
The name of your mutual fund does matter. It must line up with the fund's investment mandate, which helps protect investors from being deceived.
This is major progress from how funds were named in the past. It matters because people who are new to the game often pick a fund for its name. When a fund is called, for instance, the "ABC dividend fund," people who put their money into it should have a basic guarantee that they are investing in what the fund name describes.
Caution Still Matters, Even With Naming Safeguards
As it relates to this topic, naming customs and rules also mean you shouldn't end up owning a global fund that has half of its money invested in the U.S. and should 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 the vital low-down on the fund expense ratio, which is the annual fee that is charged to owners. Knowing this is vital to your success as a fund investor. What's more, you'll want to take a look at all parts of the fund in the annual report.