Best Mutual Funds, Mutual Funds Basics, Sector Funds, ETF's, Exchange traded funds, Top Mutual Funds, stock market, stocks, bonds   Best Mutual Funds, Mutual Funds Basics, Sector Funds, ETF's, Exchange traded funds, Top Mutual Funds, stock market, stocks, bonds 
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Sector Funds

Home > Mutual Funds > Sector Funds

Best Mutual Funds, Mutual Funds Basics, Sector Funds, ETF's, Exchange traded funds, Top Mutual Funds, stock market, stocks, bonds
Sector funds are very risky’. ‘He doubled his money with Fidelity Select Technology in just 12 months’! ‘Stay away from sector funds'. Sounds confusing? You are not alone. Sector funds are among the most misunderstood and misused investments. So, how should you go about using sector funds?

Sector funds restrict their investments to a particular sector of the economy. An example of a sector fund is Fidelity Select Healthcare (FSPHX). By focusing on stocks of companies in the healthcare sector, the price moves of this fund are more dependent on factors that impact the healthcare sector rather than the economy in general. Demographic change, such as increasing age of the population, is an example of a factor that specifically drives investments in the healthcare sector. By diversifying its assets across over 60 companies from the healthcare sector, Fidelity Select Healthcare provides investors with an opportunity to benefit from secular trends driving the demand for healthcare while mitigating company-specific risks such as failure of clinical trials conducted by a particular company.

Sector funds can be used to create a diversified mutual fund portfolio
You can effectively create a diversified mutual fund portfolio by allocating assets across a group of sector funds. This strategy gives you the flexibility to over-weight or under-weight certain sectors versus broadly diversified indexes such as the S&P 500.

A diverse group of sector funds to choose from is essential to implement this active approach to money management. Fidelity Investments offers 41 sector funds under the Fidelity Select Portfolios banner which makes this family of sector funds well-suited for this purpose. By dividing assets across, say, 8 sector funds in the Fidelity Select Portfolios, e.g., Fidelity Select Biotechnology (FBIOX), Fidelity Select Computers (FDCPX), Fidelity Select Energy Service (FSESX), Fidelity Select Home Finance (FSVLX), Fidelity Select Medical Delivery (FSHCX), Fidelity Select Multimedia (FBMPX), Fidelity Select Retailing (FSRPX), and Fidelity Select Wireless (FWRLX), you can build a customized diversified portfolio. With each of the sector fund managers actively looking for the best investment ideas within their sectors, this cluster of Fidelity Select Portfolios packs a lot of punch into your diversified portfolio.

Other mutual fund families that provide wide choices of sector funds include ProFunds and Rydex Funds. Exchange traded sector funds such as Select Sector SPDRs, iShares, and Sector HOLDRS, that trade on the American Stock Exchange, can also be used to create diversified sector fund portfolios.

The wide selection of sector funds available enables you to take advantage of changing market conditions and continually optimize the risk-reward characteristics of your diversified portfolio. To use this approach effectively, you need to understand and follow the dynamics of individual sectors. You must also be able to make informed decisions on which sectors to select and which ones to avoid. You should be right more often than wrong with the sectors you select.

By constructing diversified mutual fund portfolios using sector funds, investors have the potential to outperform the market averages on the basis of relative returns as well as risk-adjusted returns.

Diversification is one of the cornerstone principles of investing in mutual funds. Sector funds that focus on high-growth sectors or narrow niches of the economy could to be more volatile. It is not advisable to commit a substantial portion of your total assets to a single sector fund. Maintaining adequate diversification across sectors in your overall mutual fund portfolio is the recommended good investing practice.

Key Points to note

1. Sector funds are investment vehicles that focus their investments on a particular industry group or sector. Sector funds give investors with an opportunity to profit from trends affecting a particular sector or industry while reducing company-specific risks.

2. High-potential, diversified portfolios can be created by dividing assets among a group of sector funds. This active investment approach requires one to make informed decisions on sector selection. A power-packed cluster of sector funds may offer the potential to outperform market averages.

3. It is good investing practice to diversify mutual fund portfolios across sectors.

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