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Should you invest in international funds?

July 9, 2020

Investing correctly with the prospect of profit is the key to a stable and prosperous future. When we talk about international investment, it is important to understand that in such conditions there are specific characteristics of the movement of funds among countries. From international funds, investors often expect increased returns from ten to a hundred percent. However, few people understand the benefits along with the involved risks of such an investment.

Features of international investments

International investment refers to the investment of financial resources for their future full return and guarantee of the extraction of additional profit. Here it is important to take into account the conditions and characteristics of the flow of financial resources among countries. Historically, some states are characterized by weak economic development, while other countries, acting as leaders in the international arena, impose their opinions and conditions for the development of the world economy. 

Therefore, one should note that the major difference between international investments and ordinary ones is that international investments are changing because of the participation in the economic processes of several countries. 

The benefits of international investments include:

  • the guaranteed opportunity by the state to organize an enterprise that will work with foreign capital;
  • the ability to take advantage of the benefits of operations with foreign capital, which is a significant saving;
  • the ability to avoid most taxes or use the lowest rates;
  • the almost complete lack of control of the organization’s financial resources by its state;
  • the lack of conditions for the rapid return of international investment, which results in the possibility of stable development of organizations with foreign participation.

Direct and portfolio international investments 

Direct and portfolio international investments
Direct and portfolio international investments 

Making a foreign direct investment, the investor expects that these resources will be returned in the long run and increase after any activity. At the same time, the investor has an opportunity to control their capital. Thus, direct international investments can include a wide variety of options, such as transactions with an investor, investing in any type of property abroad, in various subsidiaries and branches, acquisition of foreign firms, or their securities.

Portfolio international investments are the acquisition of securities of some foreign company to the extent when the investor does not receive the right to control the organization itself. This makes it possible to make a profit, although without participating in the enterprise’s management. It should be noted that international organizations have limited rates for enterprises with foreign capital to 10%. They need it to ensure the equivalence of direct and portfolio international investment.

What is an investment fund? 

An investment fund is an organization that receives investments from a wide variety of sources. They can be both private individuals and legal entities. When the investment fund has gained enough finance, it uses a professional market participant to acquire securities whose ownership can bring substantial profit to all participants of the investment fund itself. For many investors, the professionalism of an executor becomes a determining factor when deciding whether to contact such organizations and conduct international investments in them.

Because of the accumulation of large capital, an investment fund can gain securities on favorable terms and bring more profit than individual market participants. The received profit is divided among investors as a percentage of their deposits, and the commission to the fund manager, which ranges from 7 to 20%. Currently, there are such types of investment funds as mutual investment funds, exchange, money market funds, and hedge funds.

Today in the world the most common funds are investment mutual funds of a managerial type. These are organizations in the form of a joint-stock company when instead of the usual deposits and agreements investors can simply buy their shares. Shareholders will receive profit in the form of dividends, as well as an increase in the value of securities. Today, the share of such investment funds is 93.3%.

Tips when investing in international funds

It will be useful to get acquainted with tips when working with international funds.

  • Invest only in funds whose activities are easy to understand
Investing in international funds
Investing in international funds

If the work of the fund is too complicated to quickly and concisely explain it, this is the first sign that specific schemes are involved. It’s better to stick with organizations that are simple and easy to understand.

  • Count on periods of 5 years or more

High-yield funds are good, but betting on assets with high volatility is not always a wise decision. Even the famous Warren Buffett recommended using the least risky management strategies that allow investors slowly but surely increase their capital.

  • Pay justifiable expenses

Such factors as tax efficiency, estimated net income, and possible risks must constantly be weighed with each other in order to make sure that profit is more than the total number of expenses.

Knowing the risks involved

Investing market specialists distinguish two key risks in international funds’ investments. The first one is the currency exchange difference. The second – economic and political changes. Knowing the risks that an investor may face, it is worth choosing the right investment strategy that will help minimize possible drawdown. Since market risk relates to a particular country or industry, or the entire world economy, it cannot be completely eliminated, but the consequences for the investment portfolio can be mitigated by applying a diversification strategy. That means investing in the economies of different countries, industries, asset classes, and in different currencies, protects the portfolio not only from the influence of various economic and political factors but also from the devaluation of the currency and allows investors to get ahead of inflation.

All in all, low investment risks, investor capital protection, a wide range of instruments, low commissions make investments in international funds accessible, and appealing to many investors. That means such investments abroad have enough advantages to consider them as a good alternative today.

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