NEW YORK - In a year when many U.S. mutual funds have plunged, overseas funds might look especially tempting.
"For a while, there wasn't that much interest in overseas funds simply because the U.S. stock market was strong and people didn't need to diversify," said Jody Eisenman, chief executive of PHD Capital, a New York investment bank. "Now that the market's weaker, it's more attractive. It's an area that people should definitely consider and explore."
Overseas funds can be a great way to diversify an investment portfolio, according to many investment experts, because they spread risk among different countries. But there are some differences between foreign and U.S. funds. Although it's possible to lose money on any investment, overseas funds carry some unique risks.
Many advisers suggest investors make sure they're comfortable with a few key variables before making any commitments:
Currency. The value of the U.S. dollar against a foreign currency has a significant effect on returns. Generally, a stronger U.S. dollar translates into weaker earnings for American investors.
Laws. Tax laws governing stock foreign ownership vary country to country, and can mean a big bite out of profits.
Political risks. Changes in government can have a big effect on a foreign company's earnings and, in turn, its stock price.
Trends. Just because something is happening in the United States doesn't mean the same is true for overseas markets. The high-tech boom that sent U.S. equities soaring in 1999 didn't have the same impact on European stocks.
Caveats such as these are some of the reasons mutual funds hold special appeal for investors looking to get into the international market. In addition to handling tax, legal and logistical challenges associated with foreign stocks, mutual funds offer professional guidance.
"The idea with investing in a mutual fund is that you can get exposure to future Nokias or other big companies of the world before everybody else has discovered them," said Katherine Schapiro, who co-manages Wells Fargo's International Equity Fund. "But it's almost impossible for an individual, unless they've dedicated their life to it, to be able to search foreign countries, understand all the risks and find these companies before anyone else."
Experts say the first thing investors considering overseas funds need to do is figure out their risk tolerance. Some of the same criteria used to evaluate domestic stocks can be useful in picking a foreign fund.
"If you want a moderate risk, you may want to look at a large-cap fund," which focuses on big companies, said Stacey Ho, the second co-manager of the Wells Fargo fund. "If you want a little bit more risk, then look at small-cap international stocks," which focus on small companies.
Investors also need to consider a fund's long-term performance, its management and its goals, said Edward S. Rosenbaum, vice president and head of research at Lipper Inc. This year, European funds are down 9.5 percent and Asian funds are off more than 28 percent, according to Lipper. But since 1990, European funds are up 8.2 percent, Japan funds are 2.6 percent higher, and Pacific funds are up 22.7 percent.
Global equity funds, which hold foreign and U.S. stocks, might be another way to lessen risk.
International stock fund investing has increased in the past 10 years, but still remains a small part of the overall industry. In 1990, international stock funds made up 4 percent of mutual funds; today, that percentage is closer to 6.3.
The number of funds and assets has increased from 58 with $14.2 billion in 1990 to about 465 and $270.4 billion in assets, according to the Investment Company Institute, a mutual fund industry trade group.
Susan Wyderko, director of the Securities Exchange Commission investor education office, said there's nothing wrong with wanting to be part of the overseas investing trends, but investors need to be savvy.
"You need to do your homework before you put in your investment dollar," she said.