Foreign investment fund or FIF

Foreign Investment Funds or FIF are mutual funds that invest abroad featuring investment policies that can vary across many assets such as fixed income, equities, oil, or gold. These funds provide the investor with the ability to earn higher potential returns compared with solely staying in the domestic market. They also help diversify one’s investment risks. Most of these funds tend to contain high to very-high risks since investing in assets in a foreign country exposes the investor to considerable market risk and foreign exchange rate risk; the amount of risk can vary depending on the extent of foreign-exchange risk hedging used.

Foreign Investment Funds represent the only fund category approved by the Securities and Exchange Commission and Bank of Thailand to mobilize funds from Thai investors for the purpose of investing in foreign assets overseas in an effort to diversify risks and enhance investment return by tapping foreign markets. There is a wide range of financial instruments and assets are available worldwide, offering varying levels of financial returns.

FIF funds can re-allocate investments from one country
to another country possessing better economic 
and investment prospects.

As such, FIF funds tend to have high to very-high risk as there is exposure to both market risk and foreign-exchange risk. Some funds hedge against foreign-exchange risk to reduce this exposure. A FIF fund that specifically concentrates its investments in a single country is also highly risky as it is very susceptible to events in that market which could impact the fund. Allocating the portfolio across investments in many countries can help the fund diversify risks, whereby risk will be diversified according to weightings in various instruments and securities. FIF funds present an interesting choice for investors seeking a new type of investment or wish to diversify into foreign markets offering attractive returns.

The Risk of Investing in FIF

Investors need to understand the risk of investing in a FIF fund because there is exposure to more risks than domestic funds. The risks of investing in a FIF fund include:
 

• Securities-related Risks. As example, equity funds are subjected to market volatility while fixed income funds are exposed to credit risks and liquidity.
   
• Country Risk which stems from economic and political conditions in that particular country, such as due to policy changes, political events, and economic uncertainty. For instance, an economic crisis in Thailand affects Thailand but may not impact a foreign country.
   
• Regulatory Risk. This refers to uncertainty regarding change in laws and regulations of the country the fund invests in. These may include foreign investment limits, relevant laws, regulations affecting the stock market, fees, taxes, etc.
   
• Foreign Exchange Rate Risk which refers to fluctuations in the strength of the currency may generate a lossor gain for investors. Investing abroad involves conversion of Thai Baht funds into foreign currencies before making the investment. Likewise, when financial returns or sale of foreign investments go through a process of conversion bac into Thai Baht to remit back to Thailand to settle redemptions or liquidate when the fund matures.

Despite the risk of 
investing abroad, most 
risks can be managed 
as shown below:

• Reduce country risk by diversifying investments across several countries
• Reduce foreign exchange rate risk by using hedging instruments
• Reduce regulatory risk by deploying capable advisors and legal consultants with expertise on those countries