NEW YORK (CNN/Money) - Financial funds have been heading down since the Fed recently hinted about a possible interest-rate hike later this year. But managers insist that higher rates do not spell doom and gloom for the sector.

In fact, plenty of financial stocks -- including brokerages and big "money center" banks -- should do well this year in spite of the possibility of higher rates, managers said.

"We have some good times left for financial stocks," said David Dreman, manager of Scudder-Dreman Financial Services Fund. "The outlook is good; earnings are strong."

The financial sector is comprised of a diverse group of stocks including banks, insurers, brokerages, thrifts, savings & loans, and publicly-traded fund companies.

Many of the companies are sensitive to rate fluctuations and market movements. For example, lower rates encourage more people to refinance their homes, which generates fees for the banks. And a rising market helps the brokerage stocks and asset managers.

TOP 5 FINANCIAL FUNDS       • Profunds Ultra Banking Inv., up 10.8 percent • FBR Small Cap Financial, up 10.3 percent • Senbanc Fund, up 10.3 percent • Diamond Hill Bank & Financial, up 10 percent • Burnham Financial Services A , up 8.9 percent • Source: Morningstar (Data as of March 26)

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But in spite of record low interest rates, financial funds have delivered mixed results in recent years. They shined in 2000, when most of Wall Street was down. But they suffered along with everything else last year.

This year, the funds are up about 3.6 percent in the first quarter as of March 26, compared with a loss of 0.5 percent for the S&P 500. Out of about 60 funds in the category, top performers include FBR Small Cap Financial, up 10.3 percent, and Diamond Hill Bank & Financial, up 10 percent, according to Morningstar.

Funds that went heavier on banking stocks and lighter on brokerage stocks have had better luck this year, said Jeff Tjornehoj, an analyst at Lipper. Quaker City Bankcorp (QCBC: Research, Estimates) , for example, a savings & loan in southern California, is trading near its 52-week high. Another favorite of winning funds, Hawthorne Financial (HTHR: Research, Estimates), a savings bank based in the same region, is up about 40 percent this year.

Performance during the last week, however, has painted a different picture. The Fed last week shifted to a neutral policy stance and signaled that rate hikes may be possible later this year as the economic recovery continues. Rate-sensitive financial funds tumbled about 2 percent as a result.

Still, the economy has rebounded faster than most thought it would, and that's been a help to the sector overall, said Jim Schmidt, manager at John Hancock Regional Bank Fund and John Hancock Financial Industries Fund.

The regional bank fund, with $865 million in assets, is up 6.3 percent this year as of March 25, according to Morningstar. The financial industries fund, with $470 million in assets, has had a tougher time, up about 0.1 percent, because of weaker results by the big brokerage houses.

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Schmidt said investors tend to overplay the idea that rising rates will hurt financial stocks. Not all stocks suffer when rates go up -- commercial banks and insurers, for example, are more resilient. And brokerage stocks aren't affected by rates directly, though higher rates can hurt the market.

Since 1985, when Schmidt first launched the John Hancock Regional Bank Fund, banking stocks have outperformed the market 40 percent of the time when rates are rising, he said. (He hasn't done the analysis for other stocks in the sector.)

A stronger market and economy should help some of the larger banks deliver better earnings this year, such as FleetBoston Financial (FBF: Research, Estimates) and Keycorp (KEY: Research, Estimates), Schmidt said. Brokerages Lehman Brothers (LEH: Research, Estimates) and Goldman Sachs (GS: Research, Estimates) will also get a boost.

And banks who have commercial loans should benefit, since those loans are linked to the prime rate. (The prime rate is the best rate banks use for loans to top customers. It rises when the Fed raises rates.) Among these stocks, Schmidt is upbeat about Cullen/Frost Bankers (CFR: Research, Estimates) and City National (CYN: Research, Estimates).

Dreman pointed out that earnings of insurer American International Group (AIG: Research, Estimates), as well as mortgage companies Freddie Mac (FRE: Research, Estimates) and Fannie Mae (FNM: Research, Estimates), are all growing at a rate of 15 percent a year. His fund, with about $20 million in assets, is up 1.9 percent this year.

And Dreman thinks it will be a few quarters before the Fed raises rates again. "This is a very slow recovery. I don't think they're going to raise rates any time soon."