How to Invest in Emerging Market Funds

Definition of “emerging” markets

When a country is encountering business and/or social activity while in the process of rapid industrialization and growth, they are said to be “emerging” markets. According to “The Economist”, a weekly English language international affairs and news publication, as of the first of this year (2010), there were now 28 recognized emerging markets in the world today. Currently, the largest emerging market is the ASEAN–China Free Trade Area, which was launched on January 1, 2010.

The upside to investing in emerging markets

In many countries that are deemed as emerging markets, such as China and India, their industrial base is literally ballooning, meaning that the growth potential is extremely high. Smaller companies who sell the right products or services can benefit from this and grow into much larger companies in a very brief period of time, making them extremely viable investment opportunities for the smart investor. If you get in on the ground floor with these companies, your investment will grow as the company grows.

5 steps to investing in emerging market funds

Emerging markets typically involve those countries that were once considered to be “3rd world” nations, but now they are rapidly growing into more developed nations. It is a transitional period which usually witnesses rapid economic development and growth. One of the best ways that you can diversify your investment portfolio is to invest in emerging market funds. Here are 6 steps you can take in order to invest wisely.

1. Do your homework first – it is imperative that you learn which countries are considered to be strong emerging markets before you ever invest a dime in any of them. Emerging markets today include countries such as China, India, Mexico, and Thailand.

2. Assess your tolerance for risk – there is inherent risk involved whenever you want to invest in an emerging market as these markets tend to be extremely volatile at times. Most emerging markets have the following risk factors to contend with:

• changes in that country’s national policies
• currency exchange risk
• economic instability
• political instability

When all else fails, remember the cardinal rule of investing – never invest more than you can safely afford to lose.

3. Market fluctuation tolerance – due to their expanding and growing nature, you will see a lot of up and down movement in these markets. Sometimes these fluctuations can be very abrupt. So you need to know how well you can tolerate these movements in those markets.

4. Look at these investments for long-term purposes – because of the risks involved with these markets as well as their volatility, it can take years for that market to develop. So if you’re looking for quick profits, emerging markets are not the way to go.

5. Investment percentages should be limited – a safe move is to only allocate 5% of your investment portfolio to emerging markets. This allows you to get a true feel for the risk and volatility tolerance factors.