What is the difference between a sector fund and a diversified fund?

• A. A sector fund concentrates on a specific industry; a diversified fund spreads risk across many sectors.
• B. A sector fund invests only in cash; a diversified fund invests in equities.
• C. A sector fund is always international; a diversified fund is domestic.
• D. A sector fund guarantees higher returns.

Answer: (C)

The main idea here is how concentrated a fund’s holdings are. A sector fund concentrates its investments in one specific industry, such as technology, energy, or healthcare, so its performance tracks that particular sector’s fortunes. A diversified fund spreads investments across many sectors (and often across different asset classes), with the goal of reducing risk by not being tied to any single industry's performance.

Geography isn’t the defining factor here—sector funds can be domestic or international, depending on the fund’s mandate, while diversified funds can also be domestic or global. So stating that sector funds are always international and diversified funds are domestic misstates the distinction; the key difference is concentration versus broad diversification, not location.