Sector funds are a type of mutual funds that invest in stocks of companies in specific sectors of the economy. They hold the potential for a massive capital appreciation, albeit with high risks, should the sector where the money goes witness a downturn for an extended period. The favorable sectoral environment, on the other hand, allows investors to reap massive gains. Some popular sector funds include banking funds (invest in stocks of banks), IT funds (invest in stocks of IT companies), healthcare funds (invest in stocks of healthcare companies), auto funds (invest in stocks of automobile companies), manufacturing funds (invest in stocks of manufacturing companies), etc.