Foreign and Global Equity Funds

Foreign and global equity funds are two types of mutual funds that invest in international stocks. However, there are differences between them that you should be aware of.

• Foreign equity funds: Also known as international equity funds, foreign equity funds invest in stocks of companies outside of the United States.
• Global equity funds: Global equity funds invest in the stock of both domestic and international companies. The investment choice is generally based on how the markets in the United States and abroad are performing.

How do these funds choose the stocks they buy? The process varies, but it's usually based on factors identical to growth and income funds. This is important to keep in mind, because it means that, just like funds that invest strictly in domestic companies, foreign equity funds may be invested in blue chip corporations or riskier smaller companies. The level of risk and return varies just as it does in domestic funds.

Similar to domestic index funds, some foreign funds use an index to choose the stocks they invest in. The difference is that it's a foreign index rather than a domestic one such as the Standard and Poor's 500 stock index.

An investment feature common to many international funds is to invest in the stock of companies in one country--usually known as single country or country funds. This a variation of the sector fund theory used on the domestic front, and it carries many of the same risks that sector funds do, mainly due to the lack of diversification.

Diversification vs. risk. Are foreign and global equity funds the right investment vehicles for you? On the one hand, these funds offer some diversification as part of an overall portfolio (in various degrees depending on the type of foreign fund you choose) because the returns are based on a foreign country's economy and the strength of its currency. However, on the other hand, investing in foreign equity involves quite a bit of risk. Predicting the ups and downs of our own economy is difficult enough, but it's even more difficult to do with foreign countries.

Your level of involvement in this type of investment should be carefully based on the age and stage of your life--at a certain point, investments in foreign equities may just be too risky even at the lowest levels. Based on this assessment, you may want to stick with domestic investments of the less risky variety to diversify your portfolio.