Tips on Emerging-Market Mutual Funds

Buying mutual funds that invest overseas can diversify a portfolio that's heavily weighted toward the U.S. market. But there are pitfalls if you don't know what you're doing. Some tips, based on advice from experts:

--CONSIDER THE RISKS: If you invest in international funds, expect volatility. And funds that invest in emerging markets with immature economies will be more volatile than those in more established markets such as western Europe. If you take the leap, consider diversified international funds that look for opportunities around the world.

--THE CURRENCY FACTOR: Shifting foreign currency values compared with the U.S. dollar can heavily affect international fund performance. For example, if the dollar increases in value, the value of foreign stocks can decrease, and vice versa. Generally, currency fluctuations even out over the long run if you're years from retirement. But keep in mind how much those shifts can affect short-term fund performance.

--WATCH THE FEES: Because of their specialized nature, many international funds carry higher fees than domestic funds, particularly those focusing on a single country or region. If you're looking to invest overseas but worried about the fees, consider less expensive options, like international index funds that don't rely on active-management strategies.

--CHECK THE RIGHT BENCHMARKS: Finding a benchmark to measure a fund's performance against rivals can be tricky with overseas funds. Indexes like the MSCI EAFE, track established countries' stock markets, excluding the U.S. and Canada. But that's not a good gauge to measure performance of a fund focusing on developing nations, which can track an index such as MSCI Emerging Markets.

--CONSIDER YOUR INTERNATIONAL EXPOSURE: Many diversified funds promoted as core holdings for your portfolio already invest in international stocks and bonds alongside their domestic holdings. So if you've already invested in such a fund, think twice before increasing your international exposure further by going into a specialized international fund. Some experts suggest capping your international exposure at 10% of your overall portfolio.