Specialty Funds

As we discussed in our Mutual Funds post, when you invest in a standard mutual fund, the stocks are diversified in a nice, safe manner. Hopefully, you can ride them out and gain lots of money along the way. Retirement will be sunny and warm, and your heartbeat won’t flutter out the window every time the market shifts.

Now, in comparison, let's turn our attention to the mutual fund's cousin: specialty funds. These funds are a little more dangerous because they offer less diversification. Specialty funds instead specialize in stocks that show a strong performance and look fit, healthy, and agile.

However, looks can be deceiving. As we know, higher rewards equal higher risks, and lower diversification can be dangerous. So, with that in mind, is there ever a time when specialty funds can be a good fit? Let's take a closer look and find out.

Where do Specialty Funds Specialize?

Specialty funds have a narrower range than other mutual fund investments. Instead of diversifying and targeting specific end-term goals, they narrow in on stocks from a single sector. Gold stocks, technology stocks, and many foreign country stocks often fall into this category.

Since these funds are not as varied, you have more of your eggs in one basket. As a result, you’re looking at a more volatile fund than other non-specialty mutual funds.

When Specialty Funds Can be Beneficial

This is not to say that they are always bad: Sometimes you’ll be betting on a winner; sometimes you won’t. The trick to knowing which is a winner and which is a dud lies in the stock’s performance.

Since specialty funds are often comprised of stocks that are rising quickly, you will have to take a moment (or ten) to assess what is fueling the performance – more likely than not, that healthy fuel stream is going to peter out eventually. For example, if high oil prices are driving that sector forward, you should be watching to see if those prices might drop. Before that decline happens, you should have pulled your investment. In other words, don't ride that train too long, or you'll be left with a major loss at the end of the tracks.

Being able to determine why the specialty stock is performing well is of the utmost importance, and for that reason, you may need to turn to a skilled investor for analysis. With specialty funds, the rewards can be great, but they do take some monitoring – and an investment professional can help you stay on top of the changes .

The point is, specialty stocks are special because they are narrower in regard to the range of investments than are standard mutual funds. So, if you are willing to play a game of risk versus reward, specialty funds may fit into your portfolio. However, remember to diversify your other investments to ensure your portfolio's safety, research your specialty fund investment, and manage your risks.

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