Spread Your Risk with Sector Mutual Funds
Sector mutual funds promote themselves as helping to spread the risk of investing. Instead of buying shares of a few companies in the same line of business, you buy a mutual fund that only invests in companies belonging to that sector. With the pool of money brought in from different investors, the mutual fund is able to buy shares of many companies. Thus, you have spread your risk from a few companies to hundreds of companies.
How Many Sectors Are There?
There are not a set number of groups or categories for sector funds. Many of the brokerage houses break them down into eight to twelve groups, and then further break the groups down into sub-groups. If you are looking for one particular group of companies it should not be a problem. While there are not near as many sector funds as typical mutual funds, each brokerage house has many to choose from. And there are always new funds being added. If one sector gets hot and starts growing, then the money flows in and usually a new mix of funds is created. But research those sector funds closely, because they have no history to study.
What Is a Good Sector For Me?
I would have to say that sector funds are something to consider after your overall portfolio is diversified. This is because sector funds carry more risk than a diversified mutual fund. And some sectors carry more risk than others. Any sector that is new or trendy, like the internet companies a few years ago, will carry more risk than say utilities.
With all that being said, any sector that you have researched and feel is going to grow, or a sector that because of technology is going to create some new markets, might be worth keeping an eye on.
Is There Still Too Much Risk?
It is true that buying a sector mutual fund instead of a straight stock purchase of one company will help diversify some of your risk. But does this eliminate enough of the risk that you can sleep at night. Many brokers do not promote sector funds, stating that the fund manager, being restricted to one industry, is not allowed to use all of his expertise. Other brokers promote them heavily, telling us to catch the hot industry in a diversified position.
As was stated previously, if the value of your investments is keeping pace with your goals, and you have some money that you want to speculate with, then maybe sector funds is a good place to start. Instead of trying to pick that next hot stock, pick a sector fund that includes that hot stock. This way you have bought the stock with some diversification.
Sector funds offer an investment tool that allows diversification within one industry. If after researching some similar companies you have a feel that this group is about to grow and prosper, then buying this selective mutual fund will help spread some risk.
However, as whole, sector mutual funds have more risk than most generalized mutual funds. If the industry has a downturn, then your diversification goes out the window. In these large funds, one company cannot pull down the whole group. But if the majority of the companies suffer a setback, then down goes the fund.
Be sure and remember that among the sector funds there is a difference in the risk. An older more establish industry is safer than a newer sector. A good rule of thumb is to not invest over ten percent of your portfolio in sector funds. Do your research carefully and proceed with caution.