Sector funds

The category has been a mixed bag for investors over the past year, with energy and natural resources funds providing the most consistent returns.

Funds that invest in a single industry or segment of the economy carry above-average risk and are meant to be used for side bets rather than as the core of a portfolio. You can make a long-term case, though, for owning a fund that invests in the beneficiaries of rising oil prices.

One fine choice is the Vanguard Energy (VGENX) fund, which focuses on large energy companies.

Health care is another sector worth holding for the long run, and the Vanguard Health Care (VGHCX) fund is a strong entry. Manager Edward Owens has been on the job since 1984.

After performing brilliantly for a decade, gold funds cooled off in the first half of 2011. Gold is a good hedge against a weakening dollar. If you believe that trend will continue, you might consider Tocqueville Gold (TGLDX), a fund invested in mining companies of all sizes, most of which are headquartered in Canada but explore and develop mineral deposits around the globe.

Alternative funds

This category consists of funds that invest in assets other than stocks or bonds. Used judiciously, these funds can boost your portfolio's returns and help smooth out its ups and downs.

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Among notable funds in the category are Harbor Commodity Real Return (HACMX) and Merger Fund (MERFX). The Harbor fund, as well as a nearly identical Pimco fund, use derivatives to track a commodity index. Pimco managers, who run both funds, seek to bolster returns by actively managing the bonds that back the derivatives. Merger invests in takeover targets after a deal is announced in hopes of capturing the final bit of appreciation before the deal is finalized.

Another nontraditional fund worth considering is Wasatch Long/Short Fund (FMLSX), which, as its name implies, owns stocks that it thinks will rise in value while selling other shares short, betting they will fall in value.

This article was reported by the editors of Kiplinger's Personal Finance magazine.