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Sector fund can be very beneficial for investors, especially if investors who are the expert in that market segment. Vanguard Health Care (VGHCX) is a good example of sector fund. It will only purchase health care companies’ stock to build its portfolio. The idea is to allow investors to bet on certain industries that they think will heat up. Therefore, the best way to invest in sector funds is to really understand the industry of your choice. You should thoroughly understand what factors that may affect the returns of your industries’ stock.
Although, it may seem that you can not diversify your investments in sector funds, this is not entirely true. Even though sector funds focus exposure on a particular industry, investors can still diversify within that industry to minimize the investing risks. This can simply be done by spreading the investments across a broad of stocks.
Depending on the sector of your choice, sector funds can produce tremendous gains and losses. For instance, technology mutual funds increased by an average of one hundred and thirty five percents in 1999, and they crashed horribly in 2002.
There are no doubts that sector funds have higher risks than generalized funds. It is recommended that investors should not invest more than 5% of their total portfolio in a specific sector, especially if you are investing in highly volatile sectors.
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