Ups and Downs Of Sector Funds

Sector funds, including utility funds, have become increasingly popular with both investors and mutual-fund companies in recent years.

Sector funds invest in a specific part - or sector - of the economy, such as semiconductors or Internet stocks.

They are based on the premise that it is possible to identify which elements of the economy will do well over a specific time frame and thus reap sizable gains for investors.

But they can be tricky. A sector can sizzle for a few months, then fizzle in a week. Or it can move higher over several years, as technology stocks have done.

While stocks in the utility sector are currently doing well, that can't be said about real estate investment trusts (REITs), funds that invest in real estate, from shopping malls to office developments.

REIT funds, with few exceptions, have been hammered this year after big gains in 1997.

The same trend took place among biotechnology stocks in the 1980s. At the start of the decade, they were considered the stocks to own. By the end of the decade, the shine was off the biotech dream. (Though, oddly, it may now be returning.)

In their book "Mutual Fund Mastery" (Times Business), fund experts Kurt Brouwer and Stephen Janachowski identify three types of investment risk: "default risk," the risk that a company might fold; "market risk," the danger that the entire universe of stocks may fall; and "sector risk," the risk that a sector may give out.

The upshot: Most fund experts say that while it is fine to invest in sectors, such an investment should always be a small part of your total portfolio.

Too much focus in a sector is almost the opposite of what a mutual fund is all about: diversification, a broad exposure to the market and companies.