A value mutual fund invests in stocks that are undervalued. These are companies that — for one reason or another — are struggling, and while the stock prices are low, the actual value of the company may be much higher. Sometimes it's a matter of too much market competition; in other cases a company may be lagging behind in the latest technology or has not made a major impact of late. However, if the P/E ratio and book value of the stocks in the portfolio are good, the fund can be worthwhile. Although in recent years value funds have been outperformed by growth funds, they adhere to the old adage “buy low, sell high.” A stock that is valued at $40 but selling at $20 allows you more room for error. Even at $30 per share you would still come out ahead.

Sector funds concentrate their holdings in one industry. Rather than spread your investment around among various types of industries, they choose stocks from one particular industry, such as oil, health, utilities, or technology.

Like market timing, the idea behind buying a sector fund is to select an industry that you foresee taking off in the next few years. For example, new health-related technologies have people looking at stock in companies doing new and innovative things in medicine. Internet sector funds may also generate more attention, but be careful that an overabundance of Internet providers doesn't bring prices back down to earth. A sector fund can give you a bumpy ride if you are planning to stay there for the long haul.