Question: Could you explain the difference between an international fund and a global fund? I see both in the paper.

J. Hartley

Answer:

Dear J. Hartley,

Yours is a very good question. Most people and even some professionals are confused about these terms.

• International funds, also referred to as overseas funds, invest only in foreign stocks. Because these funds own investments around the world, their risk is somewhat balanced -- between various mature economies as well as those of emerging countries.
  
  
• Global funds not only invest in foreign stocks but they also hold U.S. stocks in their portfolios. Global funds are also referred to as world funds. The portfolio manager of a global fund moves the fund's assets around the world, depending on which markets are expected to perform well. That means that the percentage of the fund's money that is invested in U.S. stocks varies widely over time.

Tip: Keep in mind, that although the term global implies worldwide, global funds often invest up to 70% or even 75% of their funds in U.S. stocks.

Does it matter?

You might think it doesn't make too much of a difference which type of fund you should consider, but under certain circumstances there is a huge difference.

Let's say that your stock portfolio consists entirely of U. S. stocks and you want to diversify. Or perhaps you're concerned about the U.S. economy -- you think there might be a recession or soaring inflation or even stagnation. Therefore, as a protective measure you want to diversify, owning foreign stocks as well as domestic securities -- a good decision.

With that scenario you would want to buy shares in an international fund, not a global fund.

Two other categories

Before you make an investment decision, you should know that there are two other related mutual fund categories -- regional funds and country funds.

• Regional funds focus on geographical areas rather than specific countries. These areas include, among others, Latin America, the Pacific Rim and Europe. Again, your risk here is somewhat protected by diversification -- if one country within the geographical area is not doing well, another one most likely is.
  
  
• Country funds focus on a single foreign country, such as Germany, Japan or Canada. Many single country funds are closed-end funds and are sold by stockbrokers. We discussed closed-end funds in an earlier column; click HERE to read.

Caution: Keep in mind that when you invest in countries outside the U. S., your investment is subject to fluctuating exchange rates. However, you personally do not have to deal with currency fluctuations or calculating foreign taxes -- the funds take care of these things.

If you have additional questions about international funds, please write in again. It's a major topic and we've only given you a thumbnail sketch.

Good luck!