Why Invest In Financial Sector Mutual Funds?
July 13, 2010 by GuestPoster · Leave a Comment
The financial sector is a term used to refer to a category of stocks that exclusively focuses on firms that provide financial services to consumers. Thus, these stocks can be of companies that manage investment assets, provide insurance services, banking services, etc. The financial sector is a good barometer of economic conditions in general, since financial services are given full throttle by private and public interests when the economy is booming.
Investments like financial sector mutual funds invest in these stocks to provide their shareholders a specific opportunity to gain exposure to the financial sector. Since this type of fund is exposed to only one asset class, in face only one asset sub-class, it suffers a tremendous amount of market volatility as the financial services industry goes up and down. The main attraction of sector mutual funds in general is that specific sectors can significantly outperform broad market indices under the right conditions.
Since those conditions can change rapidly and without warning, sector mutual funds like financial sector mutual funds can also lose a large portion of their profits. For example, during the financial crisis of 2008, all of the major financial sector mutual funds suffered heavy losses, while the fund that was designed to short financial sector mutual funds posted terrific gains.
Financial sector mutual funds can invest in whatever security they wish, from whatever company. Since the financial sector is so broad, these funds can even invest in exotic instruments like securities backed by investment property mortgages. Mutual funds focusing on the financial sector have the potential to make great profits and great losses during bull and bear markets.
The rise of sector mutual funds has made it possible to enlarge the concept of asset allocation in order to include allocating between different sector funds. Timing the market by switching from sector fund to sector fund is easier than attempting to time the market by using pure stocks.
