Investing abroad

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3. Custody risk

Under UK law, you enjoy a high degree of protection when you place your money with an authorised UK investment firm. Any losses you suffer if the firm collapses will be made good to a maximum of £48,000. The scheme is funded by insurance contributions paid for by member firms, and ultimately backed by the government's own guarantee.

Thanks to this safety net, you do not have to worry constantly about whether you can trust those handling your money. In fact, since the maximum payout applies to assets held at each separate firm, you can virtually eliminate custody risk by making sure you never have more than £48,000 invested with any one investment firm.

Sadly, you do not enjoy the same protection when you invest with foreign firms. They may operate under laws that protect citizens in their own country, but those laws do not extend to foreign investors. It is therefore possible that you may lose everything in the event of fraud, negligence or mismanagement.

How can you minimise custody risk abroad? Your options, in descending order of safety, are:

Obviously, another means of protecting yourself is to ensure that any assets at significant risk account for only a small part of your total portfolio - perhaps 10%, and certainly no more than 20%.

1. Why invest abroad? 2. Risk and reward in foreign investment 3. Custody risk 4. Currency risk 5. UK companies are foreigners too 6. Foreign unit and investment trusts 7. Picking foreign trusts 8. How to make the most of trusts 9. Tracker funds for foreign markets 10. Foreign companies on the London exchange 11. American Depository Receipts 12. Investing in American companies 13. Investing in European companies 14. Investing in Asian companies 15. Investing in other markets 16. Dividends and withholding taxes 17. Markets go global 18. Conclusion

• Mobius on Emerging Markets