Dividend-Paying International Mutual Funds

by Will Gish

Mutual funds provide investors with the opportunity of portfolio diversification through a single investment. A diverse portfolio allows investors to earn dividends and capital gains from multiple markets while protecting against the loss of investment capital by spreading money across numerous securities. Dividend-paying international mutual funds allow investors to access foreign markets without requiring an extensive knowledge of foreign finance and business. International mutual funds exist in financially developed nations throughout the world, from the United States to India.

International Mutual Funds

International mutual funds work just like standard mutual funds. Investors purchase shares in the fund, while the mutual fund manager collects the pooled investment capital of all shareholders and purchases securities with that money. The only difference between a mutual fund and an international mutual fund lies in the investment potential. International mutual funds only invest in foreign markets -- they cannot invest in domestic ones. Some international mutual funds invest in specific national markets while others spread investments across multiple countries.

International Mutual Fund Dividends

International mutual funds pay dividends in the same manner as other mutual funds. Upon tallying the total annual profits reaped by the fund, international mutual fund administrators distribute a portion of profits to shareholders in equal proportion to the number of shares that individual holds in the fund. International mutual funds pay dividends as either cash or shares in the fund. In some instances, funds offer investors a choice: take a cash dividend or reinvest your dividend in the fund in exchange for an increased number of shares. Dividends from international mutual funds pay out in the currency of the country hosting the fund -- in the United States, dollars.

Taxes on International Mutual Funds

Investing in dividend-paying international mutual funds may afford you tax breaks. The Internal Revenue Service provides a tax break to American citizens working overseas who pay taxes in foreign countries. When you invest in an international mutual fund, you may pay taxes on dividends and capital gains in a foreign country without even knowing it. International funds usually deduct these taxes from profits before paying out dividends. As of 2010, foreign taxes paid in amounts of $300 or less can be included on IRS Form 1040, Line 47. For more costly foreign taxes paid, use Form 1116.

Lost in Translation

Rajesh Kothari, author of "Financial Services in India: Concept and Application," cautions that international mutual funds face the difficult task of working with constant currency conversions. For instance, assume you invest $1,000 in an international fund. The fund manager invests $200 of that in France, $300 in Japan, $200 in China and $300 in India. With these investments, your money gets converted to francs, yen, yuan and rupees and back. Currency may inevitably lose some value during the course of these conversions due to changes in conversion rates. Experienced firms and fund managers implement measures for offsetting or controlling issues related to conversion.

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