Emerging Markets Fund
What it is:
An emerging markets fund is a fund that invests in the securities of companies and governments in developing countries.
How it works (Example):
Emerging markets have lower per-capita incomes, above-average sociopolitical instability, higher unemployment, and lower levels of business or industrial activity relative to the United States; however, they also typically have much higher economic growth rates. China, Brazil, South Africa, Russia, and India are examples of emerging market economies, and emerging markets funds primarily invest in securities from countries like these.
While emerging markets (and thus emerging markets funds) carry higher risk than the average investment, the potential for rapid economic growth in emerging countries means a higher return potential. Emerging market funds can be very attractive to any investor who wants to cash in on quickly growing countries due to their diversification. This diversification can mitigate much of the risk of emerging markets, and the emerging markets fund's typical practice of investing in a variety of countries can further mitigate this risk -- an underperforming investment in one country is unlikely to affect the performance of investments in other emerging markets.
Why it Matters:
Emerging market funds offer higher growth and investment return potential than can be typically found in the United States. However, the markets also carry a much higher risk. By putting money into an emerging markets fund, investors are able to easily invest in these lucrative markets while mitigating some of the risk through diversification.