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What are International Funds
International funds are mutual funds that allow for investing in companies from anywhere in the world except an investor’s country of residence. Also referred to as foreign funds, international funds are different from global funds.
Global funds invest in companies from any country globally, including the country of residence.
In summary, the top 4 best fidelity funds include:
- Fidelity international index fund
- Fidelity emerging markets index funds
- Fidelity total international index fund
- Fidelity zero international index fund
International funds allow investors to potentially own shares from multiple foreign companies and are a lucrative way of attracting higher returns from a diverse class of assets. With international funds, you can target frontier, developing, and mature market investments.
These international funds also target specific markets that have a potential for growth. These markets range from government and corporate bonds to niche growth sectors. As a result of rapid growth in emerging markets, international funds have been a lucrative investment for the last two decades. They have also helped in hedging investors against the fall in the value of the dollar.
Advantages and Risks of Investing in an International Fund
International funds typically involve the owning of multiple individual stocks across different industries, and in multiple countries. Through international funds, investors are therefore able to access multiple diversification cushions which include: industrial sector, currency, and geographical diversity.
The diversification helps to protect the entire portfolio from factors such as poor performance of a particular stock or regional political instability.
2. Professional Management
International funds are managed by professional portfolio managers and analysts who have the expertise needed to research and analyze market information and companies. They are therefore a lucrative investment for small investors who would not typically have access to the expertise, global reach, and technology needed to access to invest internationally.
3. Capital Appreciation and Income
With access to emerging and frontier markets, International funds can potentially offer better capital appreciation compared to domestic funds. They also expose an investor to a broad category of income sources, compared to investing in US stocks only. However, the high potential for capital appreciation also attracts high risk due to instability in these markets.
4. Convenience and Liquidity
International funds investments allow you to automatically reinvest your income from capital gain distributions and dividends. You can also increase your investments at any time and buy or sell your fund shares at the net asset value of the day’s closing.
Risks Involved In International Stock Funds
Similar to other investments, international funds carry risks; most of which are specific to international markets. These risks include currency risks, and risks to changes in the economic, political, and regulatory conditions.
These risks are often amplified in developing countries, whose economies and markets are under lesser regulations. The investments in these countries are therefore prone to volatility.
1. Economic Risk
This risk arises from the economic conditions of a country. In a country whose economy is weak, It’s likely that the investing environment is unreliable, compared to a country with a stronger economy.
2. Political Risk
The political climate of a country can influence the economy, and investors are exposed to losses in case of political instability. Often, this risk is used as an indicator of the ability of a country to create an enabling environment for outside investments. Even in a country where the economic risk is low, an unfriendly political environment is unfavorable to international investments.
3. Currency Exchange
The exchange rate of a country’s currency against the US dollar poses a risk to international investments. Wide fluctuations in the exchange rate impact the Dollar value attached to an investment, in spite of a constant security price.
However, currency fluctuations can also favor an investor when the returns on stocks increase as a result of a decline in dollar value, compared to other currencies.
4. Less Information
When investing in international funds, financial analysts may not have a wide knowledge-base concerning international markets and stocks. This poses a great risk to investing in international funds as the buying decision may be based on incomplete information.
5. Reduced Liquidity
Some markets have a lower frequency in trading securities. This is a risk to international funds as the buying and selling of some securities is difficult. This can have an unpredictable effect on the losses or profit made if you are forced to liquidate your stocks.
Brief Background of Fidelity Investments
Fidelity Investments is an American multinational corporation that was started in 1946 as a mutual fund company.
Fidelity is one of the largest asset managing corporations in the world, with a combined total customer asset value of over $8.8 Trillion and managing assets of over $3.3 Trillion as of June 2020.
Fidelity offers a wide variety of services that include wealth management, fund distribution, investment advice, life insurance, securities execution, and clearance, as well as retirement services. Fidelity helps different types of investors in managing equity and balancing mutual funds.
Top 4 Best Fidelity International Funds
Fidelity International Index Fund offers a diversified international portfolio at a very low cost to investors. This type of fund does not venture into emerging markets, returns are influenced by lower volatility.
Fidelity International Index Fund tracks the performance of the EAFE index (Europe, Australasia, Far East Index). The fund employs sampling techniques to deliver investment results that match the underlying index.
The European stocks have a 61% allocation while Japanese equities share 25% of the funds’ assets.
With this fund, investors get exposure to industrial and financial stocks, with 14.19% and 15.72% allocations respectively.
The top 10 holdings of the International Index Fund account for only 12.55% of the funds’ assets.
The only downside to this fund is that you cannot access emerging markets and small-cap international stocks.
The objective of the Fidelity Emerging Markets Index Funds is to provide investment results that match the total returns of stocks in emerging markets.
Stocks in emerging markets are prone to volatility and are vulnerable to significant declines possibly because of adverse developments from multiple factors such as issuer, economic, political, market, and regulatory factors. These risks tend to be higher in emerging markets where instability is rife in multiple dimensions.
Fidelity Emerging Markets Index Funds employ a strategy of investing 80% of assets that are in the MSCI Emerging Markets Index, and depository receipts that represent securities included in the index.
To attempt replicating returns of the MSCI Emerging Markets Index, these funds use a sampling technique that considers the following factors: industry exposure, capitalization, earnings growth, country weightings, price/book ratio, dividend yield, and the effect of foreign taxes.
The objective of this fund is to provide investment outcomes that match the total return of emerging and developed foreign stock markets.
The fund invests 80% of the assets in securities that are included in the MSCI ACWI ex USA Investable Market Index, as well as depository receipts that represent securities included in the index.
The MSCI ACWI ex USA Investable Market Index is an index weighted by market capitalization and is designed to measure the investable equity market performance for global investors of large, mid, and small-cap stocks in the developed and emerging markets.
This fund has already accumulated USD1.9 billion in assets under management since its inception in 2016.
This fund offers the highest exposure to international stocks in small-cap and large-cap markets as well as developed and emerging markets.
The Fidelity Zero International Index Fund attempts to provide investment results that correspond to the total return of emerging and developed foreign markets.
This fund pays costs incurred during transactions such as commissions in the buying and selling of securities or during portfolio turnover. A higher portfolio turnover, therefore, implies a higher transaction cost, which may attract higher taxes if the fund shares are held in a taxable account.
Fidelity Zero International Index Fund employs an investment strategy of investing at least 80% of assets in securities from the Fidelity Global ex-US Index and depository receipts which represent securities included in the index.
These funds also employ sampling techniques to attempt the replication of the returns of the Fidelity Global ex-US Index. The technique is influenced by factors such as capitalization, dividend yields, industry exposures, price/book ratio, country weightings, earnings growth, price/earnings ratio, and foreign tax effects.
Some of the investment risks to contend with when investing in Fidelity Zero International Funds include;
- The volatility of the stock market
- Passive management risks
- Correlation to index
- Issuer-specific changes
- Foreign and emerging market risk
- Securities lending risk
What is the Best International Mutual Fund?
The best international index fund is the Fidelity International Index Fund. As of now, the fund manages assets worth $25.5 billion, with a net asset value of $39.08 and a net expense ratio of 0.035%.
This fund tracks the performance of a broad index of the MSCI (Europe, Australasia, and Far East Index). The fund ranks as the best international fund due to its large and diversified exposure of investor assets to stocks, and at a very low cost. The risks in investments are also reduced as the fund leaves out equities from emerging markets, which suffer low volatility.
What is the Safest Fidelity Fund?
Fidelity offers a wide variety of safe and high-quality mutual funds. However, the Fidelity Zero International Index Fund is one of the safest funds to invest in. This fund has a 0% expense ratio, and it aims to mirror the total return of emerging and developed markets. The fund, which is relatively new to the market shows promise to investors who want to get exposed to both developed and emerging markets.
Read more: Best Fidelity Funds for Retirees
Understanding international funds and how they work is crucial in helping investors know the best way of investing. International funds are often buy-and-hold long term investments and therefore need you to be fully aware of the benefits and risks, to ensure that you get maximum returns on your investments.
Fidelity mutual funds offer a wide range of international funds investing options that optimize returns while balancing costs for the investors. They also offer mutual fund investment options that are transparent, cost-effective, and able to hold against competitor funds. The Investoralist is here to help you understand investing, expose you to different types of investments, and compare different options for smarter financial decision making. Learn more about us.