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What are Specialty Funds?

Money Manager | Monday, January 17th, 2011

A specialty fund is form of mutual fund that invests primarily in a certain sector, industry, region, or security type. Also referred to as a “specialized fund,” these investments do not offer the diversification that many other funds do. As a result, they are often seen as a riskier investment. However, if the fund does well, there also exists a greater potential for high return and financial rewards. The term “specialty fund” is often used to describe a variety of funds, including index funds, global funds, and international funds. They are not for everyone, but for the investor who is willing to accept some risk, they can be a good addition to an investment portfolio. It’s also important to understand that a specialty fund should be looked at as a long-term investment.

Understanding Specialty Funds

In most cases, specialty funds are a good choice for the aggressive investor who is able to work within a long investment timeframe. These funds are naturally subject to a lot of fluctuation, so there can be pronounced peaks and valleys in regards to profits and losses. Unless you have a lot of investment experience, this is one case where it can be extremely helpful to have a proficient manager associated with the fund. When choosing a specialty fund, the best rule of thumb is never to invest more money than you can comfortably afford to lose, because at any given point in the investment, you could stand to lose a good portion of the investment. These funds are also not a good match for certain personal mentalities and personality types, especially for a person who tends to worry a lot about their investments.

Factors to Consider When Investing in Specialty Funds

Because of the added volatility and risk associated with a specialty fund, it can be more important than ever to choose one managed by a proficient and experienced manager. If you choose to work with a financial advisor, it’s also important to choose one that you feel you can work well with. You’ll be putting a lot of trust in the fund manager and your financial advisor in the case of a specialty fund, so check into their past history of success and failure. Of course, past history is no guarantee of future results, but it is at least a good indication. In most cases, you’ll want to follow the advice of the fund manager or financial advisor, but you should also keep a close eye on your quarterly reports. During periods of low returns or losses, it might be necessary to add further diversity to your investments, in order to counteract the negative returns of a specialty fund. While it’s important to change your investment strategy when it’s not supporting your overall goals, it’s also necessary to remember that specialty funds are designed to be an investment for the long haul. Over time, a specialty fund can often produce a very good return, if you have the ability, patience and financial means to wait out the investment.

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