Invertors’ fears over the Federal Reserve’s future rate cuts are coming true. The Wall Street rally started showing signs of coming to a halt last week. Stocks took a further beating on Wednesday after the Federal Reserve announced its third rate cut of the year but signaled a slower pace of policy easing in 2025.

Fewer rate cuts mean higher borrowing costs for a longer period, which could turn markets volatile. Given this situation, it would be safe to invest in funds from the defensive space like utilities. We suggest three utility funds, namely, Franklin Utilities Fund (FKUTX Quick QuoteFKUTX - Free Report) , Fidelity Select Utilities (FSUTX Quick QuoteFSUTX - Free Report) and American Century Utilities Inv (BULIX Quick QuoteBULIX - Free Report) .

Volatility Returns After Fed Rate Cut Announcement

The Federal Reserve announced a 25-basis point rate cut on Wednesday at the end of its December Federal Open Market Committee meeting. The decision was highly anticipated. However, investors were more concerned about how the Federal Reserve will go ahead with its future rate cuts.

Fears of a slower pace of rate cuts in the future were ignited last week after fresh data showed that inflation rose in November. The fears came true as Federal Reserve Chairman Jerome Powell said that the central bank should maintain caution as inflation remains stubbornly high” and hinted at a maximum of two interest rate cuts in 2025, based on the "dot plot" showing individual members' future rate projections.

All three major indexes have retreated from their earlier all-time highs attained over the past month after Donald Trump’s win in the U.S. Presidential election. On Wednesday, stocks took a further hit, with the Dow tumbling 1,123 points to record its worst 11-day losing streak since 1974. The S&P 500 and the Nasdaq slid 3% and 3.6%, respectively.

Inflation declined sharply over the past year but has been moving sideways in recent months. Last week, the Commerce Department reported that the consumer price index (CPI) increased by 0.3% in November, its largest rise since April, following four months of 0.2% gains. On a year-over-year basis, CPI rose 2.7%. Despite the Fed’s decisions being data-driven, investors are still concerned about the potential for higher borrowing rates, which could lead to continued market volatility.

3 Best Choices

We've identified three utility mutual funds that have demonstrated impressive annualized returns over 3-year and 5-year periods. These funds also hold a Zacks Mutual Fund Rank of #1 (Strong Buy), require an initial investment of no more than $5,000 and have a low expense ratio.

The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Franklin Utilities Fund fund seeks capital appreciation and current income. FKUTX invests at least 80% of its net assets in the securities of public utilities companies. Franklin Utilities Fund invests more than 25% of its total assets in companies operating in the utilities industry. The manager expects more than 50% of the fund's assets to be invested in electric utilities securities.

FKUTX’s 3-year and 5-year annualized returns are 13.1% and 9.8%, respectively. Franklin Utilities Fund has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.72%, which is lower than its category average of 0.95%.

To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

Fidelity Select Utilities fund seeks capital appreciation. FSUTX normally invests at least 80% of assets in common stocks of companies principally engaged in utilities and companies deriving the majority of their revenues from utility operations.

FSUTX’s 3-year and 5-year annualized returns are 16.2% and 12%, respectively. Fidelity Select Utilities fund has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.67%, which is lower than its category average of 0.95%.

To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

American Century Utilities Inv fund seeks current income and long-term capital growth. BULIX mainly invests 80% of its assets in stocks of companies engaged in the utilities industry. Within this 80% category, the managers will not buy shares of a company unless 50% or more of the company's revenues or net profits come from the ownership or operation of facilities used to provide electricity, natural gas, telecommunications services, cable television, water or sanitary services.

BULIX’s 3-year and 5-year annualized returns are 8.8% and 6.6%, respectively. American Century Utilities Invfund has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.66%, which is lower than its category average of 0.95%.

To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

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