How do I choose the best emerging markets fund?

Paul's Answer:

If you’re a long-term equity investor, emerging markets stocks deserve a place – though it should probably be a pretty small place – in your portfolio. Emerging markers stocks are relatively cheap these days, considering their growth opportunities. If the world economy continues growing and developing, companies in emerging markets will be among the prime beneficiaries.

The hallmarks of a good emerging markets fund aren’t very different from those of other stock funds. Look for a no-load fund with low expenses and good performance relative to its peers. Especially in emerging markets, look for wide geographical diversification.

An example of a good emerging markets fund is Dreyfus Emerging Markets (drfmx). The fund is relatively new (it started in 1996) and has yet to report its first positive annual return. But the fund was up 46.2 percent in the first 10 months this year and earns Morningstar’s top category rating (5) among emerging markets funds. The fund’s portfolio is value-oriented, which may give investors some extra punch.

Two other emerging markets funds worthy of consideration are T. Rowe Price Emerging Markets Stock Fund (prmsx) and Vanguard Emerging Markets Stock Index Fund (veiex).

Once you’ve chosen a fund, stick with it unless the fund makes some important change in what it’s doing. Investing in emerging markets takes patience and the ability to tolerate exceptionally high volatility. If you persist long enough, emerging markets are likely to give you a suitable reward.