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Also known as specialized or specialty funds, sector funds are mutual funds that concentrate their investment activity on a particular industry or sector of the economy. This concentrated focus is often more volatile than mutual funds that take a more diversified approach, but also offer the possibility of a higher return. It is not unusual for any given sector fund to be found near the top or the bottom of annual mutual fund performance charts, depending on the prevailing economic conditions in the market sector where the fund has its concentration.
One of the advantages of investing in a sector fund is the potential for a sizable return. Since all the investments associated with the fund are connected with a given industry or area of the marketplace, it is relatively easy to predict how those investments as a whole are likely to perform. Assuming that the projections indicate a very stable environment within that industry, and the potential for growth is pronounced, the sector fund approach could yield a significant amount of return in a short period of time.
This benefit to the sector fund can also be one of the more important liabilities with this investing strategy. Should unforeseen factors create an abrupt change in the stability of the industry where the fund’s investments are concentrated, the losses can occur rapidly and be quite significant. For example, if the market is adversely affected by a series of natural disasters that cripple the ability of an industry to produce goods or services, the securities include in the fund are likely to plummet in value, at least for a period of time.
A sector fund can be built around just about any type of industry. In the past, funds have concentrated on markets such as health care, real estate, utilities, banking, or some category of textiles. More recently, funds focused on Internet communications, green transportation, and alternative energy have come into being and attracted a number of investors who are looking to purchase the funds before the next wave of innovations occur within these particular fields.
As with any type of investment, the decision to invest in a sector fund depends a great deal on the goals of the investor, and the degree of volatility he or she is willing to assume. More conservative investors would likely be happier with mutual funds that are more diversified, and thus less of a risk. Investors who are looking for a higher return in less time may consider the risk worth the effort, especially if there is compelling evidence that the market in question will soon enter a period of great prosperity.