About International Bond Funds
Many people have purchased mutual funds that invest in bonds issued by domestic companies as well as the U.S. government. For a variety of reasons, they are making similar investments in companies and governments overseas. Today, most mutual fund companies offer that type of investment opportunity.
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Significance
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Twenty years ago, the purchase of international bonds represented less than 40 percent of all fixed-income investments. Today, overseas bond markets represent over 75 percent of those fixed-income opportunities. Mirroring that trend, mutual funds companies offer thousands of opportunities for investors to participate in emerging foreign economies as well as private international companies. It is estimated that those types of mutual funds will become one of the largest investment segments available.
Function
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Diversification should be the cornerstone of any investment portfolio, and including mutual funds that invest in international bonds is one way for you to participate in the growth of countries and companies overseas. In addition, interest rates fluctuate from one country to another, so you now have the opportunity to hedge against any downturns experienced by the bond market in the United States. Finally, we have seen considerable movement, both up and down, in foreign currencies, negatively impacting many portfolios. By investing part of your portfolio in international bond funds, you can lessen that impact.
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Misconceptions
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While the domestic bond market has been a sound investment for many people, the U.S. was the the No. 1 top-performing market in the world only twice in the past 15 years. For that reason, you stand a better chance of increasing your performance by adding international bond mutual funds to your portfolio.
Warning
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Just like investing in mutual funds containing domestic bonds, you will be just as subject to interest rate and credit risks when you invest in international bond mutual funds. In addition, international bond funds are vulnerable to economic and political instability, which can impact them, as well as currency exchange volatility that some will undergo.
Potential
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Essentially, foreign bonds run counter to their U.S. counterparts over the long term, which makes an additional case for allocating a percentage of your portfolio to international bond funds. A good example would be bonds issued by Japan and its corporations, because they react quite differently from those issued here. Some estimates show that growth of mutual funds that invest in international bonds will be staggering and that, eventually, the majority of investors will hold them in their portfolios.
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