The Specialty Funds

PERHAPS YOU think a certain sector of the economy is about to surge, and you want to cash in on its rise. Then you might want to consider buying into a specialty mutual fund that invests in that part of the economy.

About 400 funds buy stocks in particular economic sectors. They may concentrate investors' money in specific industries, such as health services, high technology or banking. Or they may focus on individual commodities, such as gold or oil and gas. They may buy foreign stocks or shares of companies operating in a particular region of the U.S. or the world.

Some mutual fund companies, such as Fidelity, Vanguard and Financial Programs, Inc., have funds that offer investors the choice of several sectors. Fidelity's Select portfolio, for instance, contained separate mini funds for 35 different sectors in mid 1989. An investor can switch money around among the sectors simply by phoning the company and requesting the change. Other companies may offer only one sector, but almost all will give the investor a choice of switching out of it and into a money market fund. That way, whenever you sense danger in the sector, you can immediately move your investment to a safe money fund.

Unlike regular mutual funds, specialty funds are not for beginners. Since they concentrate on a single type of stock, they can be highly volatile and risky. Some specialty funds tend to be quite stable, but the prices of others move up and down much more sharply than the market as a whole.

Gold and precious metals funds, for example, are mercurial. During 1980, when inflation was in double digits, they rose faster than all other mutual funds, soaring as much as 64%. Later, when gold prices fell, they plunged. But they rose again, and were the biggest gainers among funds in 1987. According to Wiesenberger Investment Companies Service, these funds rose 75.3% during the first nine months of 1987, and ended the year with a gain of 37.4% despite the crash. In 1988, however, they fell 16.8%.

If you think inflation will get out of hand once more, and are willing to take big risks for the possibility of big gains, you might put some money into gold funds. On the other hand, if you believe that inflation will not run away and the economy and the stock market will do well for the next few years, now may be the time to invest in mutual funds that aim for aggressive growth.

While these funds are not, strictly speaking, specialty funds, they do concentrate their investments in a particularly incendiary area: small companies that have large potential. Such firms tend to be involved in high tech, biotech, health care and other services. Like the companies they invest in, the funds usually jump, and tumble, faster than the market itself. In 1988, two of the top five funds in terms of total return were aggressive growth funds that invested in small companies. They were Kaufmann Fund, with a total return of 58.6% for the year, and Integrated Equity Aggressive Growth, with a total return of 48.5% for the year. But even the most optimistic analysts stress that you must be prepared to move out of highly speculative aggressive growth funds at the first sniff of decline.