A Brief Overview
There presently exist a broad range of tools in the market that makes for viable investments. These tools each operate with different mechanisms in place and may range from bonds, stocks, and options to mutual funds, exchange-traded funds, and bank products among others. Each one of these investments may also have a variety of forms.
Take, for instance, mutual funds which may be equity-based, fixed-income oriented, index funds, or balanced among others. These mutual funds may also vary in terms of the region within which they invest in securities. This article seeks to shed light on all that regional funds entail. First, though, it is important to have an understanding of what mutual funds are such that this explanation makes more sense.
Setting the Backdrop – Defining a Mutual Fund
For the uninitiated, a mutual fund refers to the pool of money that is gathered by several investors such that it can be directed towards securities ranging from bonds and stocks to money market instruments.
The operations of these mutual funds are handled by money managers that have professional experience in allocating the assets of the fund. These managers aim to generate income or capital gains for those who have invested in the fund.
The portfolio of a mutual fund incorporates a certain structure that is maintained such that it is in sync with the investment goals outlined in the fund’s prospectus.
Defining a Regional Fund
Set against this backdrop, regional funds may be defined as a form of mutual funds that are operated by money managers that seek to invest in securities. What makes these securities stand out, however, is the fact that they belong to a certain geographical region such as Asia, Europe, or Australia.
Ordinarily, a regional mutual fund has ownership of a diverse portfolio made up of companies located in and whose operations are carried out from a certain geographical region or area. That being said, a handful of regional funds may also choose to direct their funds towards a certain segment of the area under consideration’s economy. Take, for instance, a fund that focuses on Latin America as the area of its investments with the energy sector operating out of it is its sole focus. Such a fund would be viewed as a regional fund.
Understanding the Operations that Govern Regional Funds
Regional funds operate in the same capacity as all other mutual funds. This means that they too must be viewed as vehicles for investment that are composed of collections of money brought in via several investors. These investors each seek to invest in securities and the fund in question does so on their behalf. The invested money is directed towards a range of securities including but not limited to stocks, high yield bonds, leveraged loans and investment-grade bonds. While it isn’t uncommon for several of these funds to focus on a single asset class like stocks, some funds may offer their investors a well-mixed set of asset classes.
Regional funds make use of professional money managers who are tasked with having to direct where the fund makes investments such that capital gains may be generated if not income. These outcomes may be on occasion both be desired to keep in mind the fund objective.
Contrary to what the term ‘regional fund’ quite literally means, a handful of investors also view emerging markets funds to be regional funds. This happens to be the case despite the fact that emerging markets funds do not solely invest in securities from one specific geographical area alone. Emerging markets funds are known to invest in India, Russia and China apart from dabbling in a range of countries located in Africa, Southeast Asia and Latin America.
Thought Processes That Govern Investments in Regional Funds
A number of investors seek to direct their income to regional funds such that they acquire diversified exposure within a certain geographic region. This is because they are under the impression that said region provides returns that surpass the average.
The average investor is likely to find regional funds to be a practical investment. This is owed to the fact that most individuals don’t have sufficient capital such that they can sufficiently diversify their investment holdings across several individual investments within a particular geographical region. Furthermore, it isn’t necessary for said investors to have the expertise required to handpick holdings on their own.
The Forms that Regional Funds Take On
Regional funds may exist in an active or passive form, much like all other mutual funds.
In the case of active regional funds, portfolio managers or management teams are in charge of the operations of the fund. Their aim pertains to surpassing the performance of the prevailing regional index.
In the case of passive regional funds, fees are comparatively lower and the idea of performing in sync with a regional index prevails.
Regional funds are known to primarily focus on investments in publicly traded companies. That being said, a handful of active regional funds may have a limited number of investments in private companies.
Owing to the fact that certain regional funds have higher operational costs owing to their solely regional focus, investment managers tend to levy higher fees for said funds.
Examining Regional Funds Against International Funds
Several regional funds do actually fall under the category of a form of international funds. International here refers to funds that have broad exposure to regions that extend outside India or have a specific exposure to investments in a single non-Indian country. Take for instance international investment-grade bond funds that are offered by a number of investment managers.
Regional funds must not be assumed to be the same as emerging markets funds. They operate in the same manner that mutual funds do however they target investments based on a particular geographical region.