The financial sector includes banks, asset management firms, investment organizations, insurance carriers, real estate management and service providers, and other financial services companies. It represents the second-largest sector in the S&P 500 Index. Investors are embracing the industry as part of their asset allocation strategies for the long term due to these optimistic predictions. While investment in the financial services sector presents opportunity for growth, investors should be aware of the risks involved with the sector. Financial organizations face regulatory risk as greater scrutiny is placed on disclosure requirements, lending criteria and fees passed down to customers. Additionally, credit risk and liquidity risk pose major threats to financial services companies, both of which can be directly tied to the mortgage crisis of 2007.

Mutual Financial Services Fund (TFSIX)

The Mutual Financial Services Fund, managed and supported by Franklin Templeton Investments, seeks to provide investors with capital appreciation for the short and long term, with income as a secondary investment objective. A minimum of 80% of the fund's $536 million assets is invested in equity securities of companies engaged in the financial services industry that possess value characteristics. The fund's managers can invest in merger arbitrage securities, as well as debt and equity securities of companies that are out of investor favor. There is no limitation regarding the allocation of these securities in foreign or domestic markets. As of November 2015, the fund has generated a 10-year annualized return of 3.22%.

The Mutual Financial Services Fund currently diversifies fund assets throughout developed and emerging markets, including the United States, which makes up 53.99% of the portfolio, the developed European market with 21.13% of holdings, the United Kingdom with 11.42% of holdings and the emerging Asian market with 5.78% of holdings. The financial services mutual fund has an expense ratio of 1.41%, slightly below the category average of 1.5%, and investors are assessed an upfront sales load of 5.75% when they purchase shares.

Emerald Banking and Finance Fund (HSSAX)

The Emerald Banking and Finance Fund was established in 1997 and seeks to provide long-term growth through capital appreciation with income as a secondary investment objective. The fund's managers invest a minimum of 80% of the fund's $287.3 million assets in common and preferred stocks of companies engaged in banking and financial services. The fund primarily invests in domestic equity securities with growth characteristics. 

While the Emerald Banking and Finance Fund focuses on the financial services industry, the fund's managers diversify assets in terms of market capitalization. Medium-sized financial services companies comprise 19.72% of the portfolio, with small-cap companies making up 25.17%, and micro-cap organizations make up 55.11% of the mutual fund. Top holdings include Bank of the Ozarks at 3.39%, PacWest Bancorp at 3.07%, SVB Financial Group at 3.07% and Signature Bank at 2.75%. The fund has an expense ratio of 1.6%, and investors are charged a sales load of 4.75% when they purchase shares.

Fidelity Select Insurance Portfolio (FSPCX)

The Fidelity Select Insurance Portfolio has an inception date of 1985, making it one of the oldest financial services mutual funds on the market today. The fund primarily seeks to provide investors with long-term capital appreciation by investing no less than 80% of its $541 million assets in securities of companies engaged in the insurance industry. Companies may provide underwriting services, reinsurance, selling, distribution or placing of property and casualty, life or health insurance. Domestic and foreign issuers are considered for the mutual fund, and each holding undergoes fundamental analysis that includes review of financial position, industry position and market conditions. 

The fund's managers invest the majority of its holdings in the North American market, with 8.21% invested in developed European issuers. Market capitalization is also a point for diversification within the fund, with 52.54% of assets invested in large-cap companies, 27.94% invest in medium-sized companies and 14.45% invested in giant-cap companies. TThe fund has an expense ratio of 0.8%, and investors are not assessed an upfront sales load at the time of purchase. However, a redemption fee of 0.75% is imposed when shares are sold.

Schwab Financial Services Fund (SWFFX)

The Schwab Financial Services Fund was established in 2000 and seeks to provide long-term growth through capital appreciation. To achieve this end, the fund's managers invest the majority of the fund's $57.1 million assets in equity securities of companies engaged in activities directly tied to the financial services sector. The investment mix includes asset management firms, brokerage companies, commercial banks, insurance companies, savings and loan associations, and real estate investment trusts (REITs). As of November 2015, the mutual fund has generated a 10-year annualized return of 2.22%.

The Schwab Financial Services Fund does not invest in foreign financial services companies, but it diversifies fund assets among various market capitalization categories. The mutual fund consists of 30.73% giant-cap stocks, 23% large-cap stocks, 26.83% mid-cap stocks, 11.85% small-cap stocks and 7.6% micro-cap stocks. The fund has an expense ratio of 0.9%. It does not charge upfront sales loads, but it assesses a 2% redemption fee when investors sell shares.

T. Rowe Price Financial Services Fund (PRISX)

The T. Rowe Price Financial Services Fund seeks to provide long-term growth of capital as well as a modest level of income to investors. The fund's managers invest at least 80% of its $519.9 million assets in common stock of companies engaged in the financial services industry. It is unique in that fund managers have the ability to invest in financial software companies that derive substantial portions of revenues from serving financial services companies. The fund utilizes fundamental analysis to determine the growth potential for each security included within its investment mix. 

The fund's managers focus primarily on investments in the domestic market, but just under 6% of assets are invested in foreign issuers in developed markets. The T. Rowe Price Financial Services Fund is diversified based on market capitalization, including 20.42% in giant-cap companies, 24.23% in large-cap companies, 28.11% in mid-cap companies and 17.7% in small-cap companies. The fund has an expense ratio of 0.86%, and investors are not charged fees when they purchase or sell shares.