How International Stock Funds Work

Indonesian President Susilo Bambang Yudhoyono (left) greets Nigerian President Olusegun Obasanjo as they meet to discuss the future of developing nations. The economic growth of those nations is one reason to invest in an international stock fund.
Indonesian President Susilo Bambang Yudhoyono (left) greets Nigerian President Olusegun Obasanjo as they meet to discuss the future of developing nations. The economic growth of those nations is one reason to invest in an international stock fund.
Enny Nuraheni/AFP/Getty Images

You're too familiar with the news: Another U.S. company is outsourcing its customer service to a company in India. It doesn't affect you personally, so you ignore it.

But hang on. That company in India just grew a lot. If you owned stock in that company, you'd just have gotten richer. How can you find investment opportunities halfway around the world?

Well, you could pack your bags and live as a nomad, sniffing out potential growth in the developing markets of the world. Or you could invest in an international stock fund. An international stock fund is a kind of mutual fund, a company that brings together the money of multiple investors. A stock fund uses this money for investing in stocks.

Stocks are shares in a company that individuals can purchase. For example, say someone owns a company worth $1,000,000. He decides to sell it, but only wants to sell part of it, so that he can still remain in control. So he divides the assets of the company into 100 equal pieces. He keeps half of the pieces for himself, but sells the rest at $10,000 each. He still manages the company, because he owns the majority of the assets, but he's now sharing his profits with the other shareholders. As long as the company makes a profit, each shareholder receives a dividend, a small portion of the profit, proportional to the amount of shares the investor owns.

Stock funds are mutual funds that invest in stocks. The stock fund company's goal is to attract investors who contribute money, which the stock fund then uses to buy stock. International stock funds are simply stock funds that invest in foreign and international businesses.

Read on to find out how international stock funds actually work, who should be interested and why they can be rewarding.

How International Stock Funds Work

Morgan Stanley India Vice President Jayesh Gandhi (L) looks on as Country Head Narayan Ramachandran (R) speaks during a press conference to announce the launch of their new mutual fund in Mumbai, on February 7, 2008.
Morgan Stanley India Vice President Jayesh Gandhi (L) looks on as Country Head Narayan Ramachandran (R) speaks during a press conference to announce the launch of their new mutual fund in Mumbai, on February 7, 2008.
Indranil Mukherjee/AFP/Getty Images

A stock fund is powerful because it pools the money of many investors, who can therefore afford to buy many more shares in various companies than an individual could. Investing in an international stock fund means that you give money to the stock fund company and they invest it for you. You in turn become a shareholder in the stock fund company.

Stock funds, like other mutual funds, are managed by a professional investment manager, who makes the decisions about which stocks to buy and which companies to invest in. When you invest with a stock fund, you are trusting the manager's judgment to make good choices about the companies he or she buys stock in. You trust the manager to choose companies that do well and therefore make you a profit. One goal of a stock fund manager is always to try to invest in stocks that have a low market price but a high profit potential. Fund managers share the interests of the investors because their salary is proportional to how well the fund performs.

Anyone who is interested in making a long-term investment might want to invest in an international stock fund. But why choose an international stock fund as opposed to a domestic one? The answer is that the best investment possibilities are usually scattered around the world. The managers of international stock funds are able to buy stock in companies offering the best investment opportunities, regardless of where they're located. And in recent years, investments in foreign stocks have produced 2 to 13 percent more returns than investments in U.S. stocks [source: Morningstar].

International stock funds make it easy for individuals to invest in foreign companies; the stock fund acts as a go-between. International investments are more complicated than ones within the United States because they involve different economies, currencies and investment laws and regulations. Without the expertise of the international stock fund investment managers, many people would not be informed enough to make good decisions about where to invest their money overseas.

Not all international stock funds are the same, however. Read on to learn about the different types.

Different Types of International Stock Funds

Robust development in nations such as India -- where the middle class is now larger than the entire U.S. population -- can fuel the growth of international stock funds.
Robust development in nations such as India -- where the middle class is now larger than the entire U.S. population -- can fuel the growth of international stock funds.
Robert Nickelsberg/Getty Images

There are three main types of international stock funds: diversified, specialized and global. Each type invests in slightly different markets.

Diversified international stock funds invest mainly, but not exclusively, in stocks of companies that are based in foreign countries. They may also invest in some domestic stocks, or in the stocks of companies that do not have a specific geographic location, such as Web-based companies. Diversified funds also often invest in companies that are broad-based, or based in multiple countries.

Specialized international stock funds invest in the stocks of companies located in a specific country or region. This category also includes investments in "diversified emerging-markets funds," or small stock market funds in various developing countries.

Global international stock funds can invest in stocks of both U.S. and overseas markets. They are not as concerned with where a company is located as are the other two types of international stock funds, but they are international because they don't invest exclusively in U.S. markets.

There's also a difference between "open-ended" and "close-ended" funds. This distinction applies to all kinds of mutual funds, not just international stock funds. In open-ended funds, investors may sell shares they have bought back to the fund at any time. Shares from close-ended funds, on the other hand, can only be sold back to the fund when the fund terminates. This doesn't mean that you have to be stuck with the shares, however, as you can sell them to other investors if you like.

Another important consideration in international stock funds is whether or not the fund has load. If a fund has load, it means that there are sales charges added to the purchase of shares, which can be as much as 8.5 percent of the share price. This percentage is a commission that goes to the person who sold you the shares. Many international stock funds and other mutual funds are load-free, however, making for a better deal. And others are "low-load" funds that charge a fee of no more than 3.5 percent of the selling price.

If you're interested in investing in an international stock fund, you can find many listed on Internet finance sites. And you can buy shares easily by filling out an application and mailing a check. But of course it's important to do your research first to find out which kind of fund is best for you. A financial advisor can help you find good deals, as well as a fund with the right balance of risk and reward potential for your situation.

For more information on investing and international stock funds, follow the links on the next page.

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Sources

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