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Sector-Specific Mutual Funds

Owning a mutual fund that invests in 100 companies doesn't necessarily mean that you are at optimum diversification either. Many mutual funds are sector specific, so owning a telecom or health care mutual fund means you are diversified within that industry, but because of the high correlation between movements in stocks prices within an industry, you are not diversified to the extent you could be by investing across various industries and sectors. Balanced funds offer better risk protection than a sector-specific mutual fund because they own 100 or more stocks across the entire market.