In recent weeks, trade has been reeling under the apprehension of the Fed re-embarking on its path of accelerated interest rate hikes to bring down inflation. The positive mood prevailing in the markets throughout January is a thing of the past. Economic data released through February and March have fueled the notion that the labor, services and manufacturing sectors remain resilient against the tight policy moves implemented by the central bank, and this interprets into a further tightening of policy.

Treasury yields have been hovering around unchartered territories and inflation has resumed its climb. The fears of an impending recession have dampened investor mood and markets have been in a sell-off mode, with their eyes set on the Fed March meeting. Very recently, developments in the crypto market as well as the bank run, which has temporarily shut down the Silicon Valley Bank, have added to this gloom. Investors are running to the safety of defensive stocks as the market continues to be volatile.

Defensive stocks remain in demand during market downturns because of their intrinsic nature, Even during the 2008 financial crisis, they had maintained their foothold. Utility mutual funds are examples of such defensive instruments, which protect investments when the goings are not good. The steady nature of the sector is ensured by the fact that demand for essential services is relatively unaffected by market volatility because of their non-discretionary nature. Whatever the state of the economy, a household or a business needs electricity, water, or gas, even if prices go up.

Utilities are usually considered long-term buy-and-hold options as they provide a regular dividend to shareholders. Also, dividend yields on utility stocks are usually higher than those paid by other equities.

The sector has also received policy attention from the U.S. government in recent times. President Joe Biden signed the $1.2 trillion Infrastructure Investment and Jobs Act into law on Nov 15, 2021, which sets aside $65 billion to support broadband coverage and adoption, $50 billion to protect against extreme weather events, and $7.5 billion to build a national network of electric vehicle chargers. Even as recently as on Mar 9, further investment was assured.

In summary, utility mutual funds provide much-required stability and growth potential in a market that is expected to remain volatile for a while. Also, the government is keen on making it a focus area. Hence, astute investors should consider such funds at present. Mutual funds, in general, reduce transaction costs and diversify portfolios without an array of commission charges that are mostly associated with stock purchases (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

We have thus selected three utility mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive three-year and five-year annualized returns and minimum initial investments within $5000 as well as carry a low expense ratio. We have also made sure that at least 80% of the fund is invested in the utility sector.

Fidelity Telecom and Utilities Fund (FIUIX Quick QuoteFIUIX - Free Report) seeks high total return through current income generation and capital appreciation. FIUIX primarily invests in common stocks, with at least 80% of assets in securities of utility companies. The fund invests in domestic and foreign issuers. It offers dividends quarterly in March, June, September and December. Capital gains are offered twice a year, in March and December.

Douglas Simmons has been the lead manager of FIUIX since Sep 29, 2005, and 80.4% of the fund is currently invested in the utility sector. Three top holdings for FIUIX are 11.9% in T-Mobile US, 10.4% in Nextera Energy and 10.2% in AT&T.

FIUIX’s 3-year and 5-year annualized returns are 5% and 7.7%, respectively. The fund has a dividend yield of 1.9%, and its net expense ratio is 0.69% compared to the category average of 0.94%. FIUIX has a Zacks Mutual Fund Rank #2. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

Franklin Utilities Fund (FRUAX Quick QuoteFRUAX - Free Report) seeks capital appreciation and current income by investing the majority of its net assets in the public utility sector, primarily in electricity companies. FRUAX invests mostly in equity securities but may invest a small portion of its assets in debt securities. It offers dividends quarterly and capital gains, if any, annually.

John Kohli has been the lead manager of FRUAX since Dec 30, 1998, and 95.7% of the fund is currently invested in the utility sector. Three top holdings for FRUAX are 11.8% in Nextera Energy, 4.3% in The Southern Company, and 4.2% in Sempra Energy.

FRUAX’s 3-year and 5-year annualized returns are 5.1% and 9.4%, respectively. The fund has a dividend yield of 2.4%, and its net expense ratio is 0.57% compared to the category average of 0.94%. FRUAX has a Zacks Mutual Fund Rank #1.

PGIM Jennison Utility Fund (PRUAX Quick QuotePRUAX - Free Report) invests the majority of its net assets in equity and equity-related and investment-grade debt securities of utility companies. PRUAX's investable assets are usually less than its total assets to the extent that it has borrowed money for non-investment purposes, like meeting anticipated redemptions.

Shaun Hong has been the lead manager of PRUAX since Sep 29, 2000, and 89% of the fund is currently invested in the utility sector. Three top holdings for PRUAX are 15% in Nextera Energy, 5.8% in Cheniere Energy and 5.4% in Constellation Energy.

PRUAX’s 3-year and 5-year annualized returns are 4.9% and 9.3%, respectively. The fund has a dividend yield of 1.3%, and its net expense ratio is 0.83% compared to the category average of 0.94%. PRUAX has a Zacks Mutual Fund Rank #2.

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