While many investors are aware of the opportunities available in trading currencies but have no idea where to begin. The currency market is the largest, most liquid market in the world, and offers investors the opportunity to trade currencies 24 hours a day, five-and-a-half days a week. If you have always wanted to invest in the Forex, or the currency market, but have been intimidated by the idea of currency trading, you may be surprised to learn that there are alternatives available.
Foreign currency mutual funds are suitable for any investor who wishes to speculate on the value of a currency. Foreign currency mutual funds are also suitable for those who would like to hedge a currency.
If you have exposure to mutual funds in a foreign currency, you are also taking on the added the risk on the currency’s exchange rate. Due to many political and economic factors, currencies can be volatile and it can be extremely difficult to predict where they may be heading, especially in the long term. Many investors put some money into a currency mutual fund to hedge some or all of this risk.
Examples Of A Foreign Currency Mutual Fund
An example of a foreign currency mutual fund would be if you are an American and decided you wanted to invest in some companies in the UK. To do this you would have to invest in British Pounds. If the US dollar appreciated against the British pound during the course of the investment, the British pounds would be worth less when converted back into US Dollars. This is a very important consideration if you are considering investing in foreign mutual funds, as it can dramatically affect your potential return on investment.
Currency mutual funds aim to track the value of a currency against another currency, minus the management fees. Most funds track a currency against the US Dollar. If you are an American and decide to invest in the UK, like in the example above, you could invest in a British Pound mutual fund. This would act as a hedge against your currency risk.
Here are some examples of Currency Mutual Funds and their symbols:
British Pound Sterling Trust (FXB) Euro Currency Trust (FXE) Australian Dollar Trust (FXA) DB Currency Index Value Fund (DBV) Canadian Dollar Trust (FXC) Mexican Peso Trust (FXM) Swedish Krona Trust (FXS) Swiss Franc Trust (FXF)
Mutual funds are not the only way to invest in or speculate in currencies. Another popular way is to invest in currency exchange traded funds. These foreign currency ETFs make it possible for even the small investor to take a position in the currency market, and can also be an excellent tool for diversifying your portfolio. Foreign currency ETF are a great option for many new investors as they offer the tradability of a stock, as well as low fees.
There are also currency futures, also referred to as foreign exchange futures or FX futures which is a futures contract to exchange one currency for another currency at a price that is fixed on the purchase date. There is also spot forex trading, which are trades between a buyer and a seller that are carried out instantly. Both of these investing options can also assist you in hedging against risk, and realizing maximum gains.
There are always potential drawbacks to every type of investment, and the pro and cons should be weighed carefully before committing any capital.
If you are looking for a good broker for investing in currency mutual funds, I personally use Zecco and would highly recommend them. Zecco offers low cost trades, comprehensive free research tools and excellent customer service making Zecco an excellent brokerage for you to consider.