What are Sector Funds?

With your brand new job comes fantastic benefits, including a company sponsored 401k. You have been following the news and market trends and know that although the economy is shaky, you feel confident in the money market options offered through your 401k-portfolio manager. However, there are certain industries that you want to avoid, so you are opting to avoid those specific “sector funds.”

Sector funds are a type of money market fund. This type of collective investment scheme focuses their investment efforts on a specific piece of the market, whose components share similar characteristics.  Sector funds tend to exist for almost every fraction of every industry, including health care, real estate, precious metals, communications, financials, natural resources, technology, and utilities. The sector funds narrow even further within those main categories.

Investors who want to reduce the risk of negative price movement in their financial portfolio often use sector funds. Sector funds tend to be more volatile then other mutual funds as the value of the fund is based on the sector as a whole. But if people feel extremely confident about one sector over another, it is a good way to strategically balance out the risk of their overall portfolio.

Because sector funds are riskier investments, experts advise not to put more than 5% of ones entire financial holdings into those kind of money markets. Like any higher-risk investment strategy the payoff can be substantial, but the losses can be crippling if consumers don’t balance their portfolio wisely.

If an individual has always had a good gut feeling and ability to predict trends, sector funds can be a good way to diversify their investment strategy. Sector funds focus their strategies completely in one market area and if a person has a particular interest, this is a great way to target your passion.