Sector mutual funds limit their diversification. They still have a number of different investments in many different companies – but in just one business segment.
Sector mutual funds restrict their investments to a particular segment or sector of the economy, perhaps concentrating on one industry such as infrastructure, energy, biotechnology, utilities, or pharmaceuticals.
The advantage of sector mutual funds is that it allows investors to focus at least a portion of their investment portfolio on specific industries or sectors, which have strong growth potential. Munder NetNet, for example, holds only Internet-related stocks. Fidelity has a whole stable of sector funds from Fidelity Select Insurance to Fidelity Select Automotive
At first glance, sector mutual funds may seem to disregard the primary advantage of mutual funds – that of diversification. In other words, if one or two companies in your fund tank, you don’t lose all of your money. While investing in sector mutual funds focuses your exposure on a certain industry, it does allow a certain amount of diversification. By spreading your investment across a broad representation of stock, there is diminished risk than if you put all of your investment on one company.
Because of this specialization, sector mutual funds tend to carry more risk than a generalized fund. Experienced investors who are willing to play close attention to the market may do well with sector mutual funds.
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