What are Emerging Market Funds?
Emerging markets are those countries that haven't reached developed market
An emerging market fund is a mutual fund or ETF that invests its assets
Emerging market funds offer investors great value through investments in mutual funds or ETFs and various traditional asset classes, including equity and fixed income. In addition, investors may focus on a single country or a more diversified portfolio across emerging countries. So, let’s get an idea of EM funds.
What are Emerging Markets?
Emerging markets are those countries that haven’t reached developed market status yet, but are rapidly growing in size and scale and are expected to be among the world’s growth engines in the not-too-distant future. Under the emerging growth phase, these countries offer high potential returns with higher risks than developed market countries.
Among the top index providers of the world, MSCI has classified more than 20 world economies, including China, India, Indonesia, Korea, Chile, Colombia, Russia, Saudi Arabia, South Africa, Turkey, United Arab Emirates, as emerging markets. Brazil, Russia, India, and China, are considered the four largest emerging markets, known as the “BRIC countries.” In addition, among other major emerging markets, Mexico, Indonesia, and South Africa are also there.
What are Emerging Market Funds?
An emerging market fund is a mutual fund or ETF that invests its assets highly in varying asset classes such as stocks, bonds and other securities of developing countries. There are dozens of countries that fit the criteria of emerging markets. Funds specializing in emerging markets range from mutual funds to exchange-traded funds (ETFs).
The common emerging market fund holdings are companies operating in Brazil, Russia, India, China, and Taiwan. In addition, one can buy mutual funds in the category, for example, the popular iShares MSCI Emerging Markets Index, S&P Global Broad Market Index and the Vanguard Emerging Markets Stock Index Fund.
Types of Emerging Market Funds
Equity funds generally invest primarily in stocks for long-term capital appreciation and income. These funds may focus on investing in value or growth stocks of companies in individual emerging market countries or regions having a specific investment style.
These are debt instruments issued by various public and private entities in emerging markets, including sovereign governments, international agencies, state and local authorities, and private corporations.
Blend funds or “hybrid funds” typically invest in a combination of value and growth stocks to provide diversification between the two investment styles.
What’s the advantage of investing in Emerging Markets?
Emerging market mutual funds give the potential to improve your portfolio’s overall long-term returns. In addition, it is an opportunity for long-term & growth investors to get exposure across the emerging market segment.
Emerging markets tend to have favorable demographic trends and opportunities for relatively high economic growth rates. Moreover, it gives access to some of the world’s fastest-growing economies.
Investing in emerging markets can help diversify one’s portfolio by investing in over two dozen countries with different economic drivers and divergent economic cycles. Investors also get opportunities to invest in sectors and themes that may not be available in their native country.
What are the risks involved?
Volatility plays a more crucial role in emerging markets than in developed markets. Therefore, it’s important to be aware of the following risks of investing in emerging markets.
- Currency risk — EM funds have the chance of volatility in the currency. Suppose foreign currencies fluctuate against the U.S. dollar. In that case, investments will also experience volatility as a return will depend on the price of securities and the value of your currency related to the currency of the market you have invested.
- Inflation risk — Strong economic growth can lead to higher inflation in emerging economies.
- Liquidity risk — Emerging markets tend to have lighter trading volumes, and these markets are generally not as liquid as developed countries.
- Institutional risk — Looser regulations make it challenging to make informed investment decisions and can increase fraud.
- Political risk — Emerging markets tend to have more political instability, political conflicts, and uncertainty that pressurize stocks.
There is much potential to earn profit as emerging markets develop. However, it is crucial to evaluate individual stocks effectively. Therefore, investing in emerging markets can be risky. Seek the advice of a mutual fund consultant to get the correct exposure in the emerging markets.
That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.
With this one can say “Mutual Fund Sahi hai”, so let me do Nivesh