Focus Your Investments for Maximum Growth: Choose Sector Mutual Funds

Sector Mutual Funds. Mutual funds that allow you to invest in companies in a single sector are called sector funds. There are many different types of sector funds, so all you have to do is choose one or more that you like. Adding sector funds to your portfolio is a great way to make it more diverse.

You can choose from a huge number of tech stocks or energy stocks. In each of these sectors, there are also subsectors. Now, don't let all of this confuse you. A good broker who is worth their salt can keep things straight for you and explain anything that is confusing.

You've heard that it's important to have a diversified portfolio, but have you heard that if you invest in both sector mutual funds and regular mutual funds, there may be some overlap that could make your risk of loss higher? Combining an energy fund with a subsector fund like wind turbine energy is a good way to reduce this risk.

Sector funds are also a good way to make sure your portfolio is complete and doesn't have any holes. They can be used to keep track of growth in any area. Like when the stock market hit rock bottom a few years ago and car company stocks were very low. If you had a sector fund with car company stocks as the sector, you could have made a lot of money when the prices of the stocks started to go up.

People think that sector funds are riskier and more volatile than regular mutual funds because they are so focused. Because of this, you might want to limit the number of sector funds. Because economic indicators are always changing, every sector acts in a different way at any given time. Some sectors have been known to have higher highs and lower lows than some broad-based mutual funds, and subsectors can be even more volatile. Because sector funds change hands so often, you need to be aware of taxes. The fund buys and sells its own assets, which is shown by the high turnover rate.

You need to think about how your very risky sector funds will affect your taxes. If you make money and get paid for it, you will have to pay taxes on it at the current capital gains tax rate, which is about 15%. If you lose money, you can, of course, deduct that as well.

You can also lower your risk by using sector spider funds or exchange traded funds. Both of these funds trade on the open stock market just like stocks, but they also offer the diversification that comes with a sector fund. Spiders and ETFs have lower expense ratios and more ways to invest, such as short sales.

Talk to your financial advisor about sector mutual funds at all times and ask for their advice. You and your financial advisor can look over your portfolio together to see where it is lacking and what kind of sector fund is needed to fill any gaps in diversification and help you come up with a good investment strategy to lower your risk.