The retail sector has had an impressive journey amid rising prices and inflationary pressures. Retail sales grew in July, lifting investor confidence and easing concerns over the economy’s health following three straight months of weak job growth.

Given this situation, retail and discretionary funds are looking increasingly attractive for investment. Investing in funds, such as Fidelity Select Retailing Portfolio (FSRPX Quick QuoteFSRPX - Free Report) and Fidelity Select Leisure Portfolio (FDLSX Quick QuoteFDLSX - Free Report) , could be a smart move.

Retail Sales Surge in July

According to the Commerce Department, retail sales rose 0.5% in July after an upwardly revised 0.9% gain in June. Retail sales were up 3.9% year over year. The July boost was largely fueled by a 1.6% rise in auto dealership sales, building on June’s 1.4% gain. Online sales grew 0.8% after a 0.9% increase in June, while clothing and furniture store sales rose 0.7% and 1.4%, respectively.

Consumers have been spending cautiously and saving more amid concerns about a slowing labor market and the possibility that President Donald Trump’s tariffs could drive inflation higher. The tariffs have already led to higher prices in June and July, which, to some extent, were responsible for the rise in retail sales. This uptick gives room to the Federal Reserve reason to hold interest rates steady at 4.25-4.5% for an extended period.

However, investors remain hopeful that tariff impacts will be limited, especially after the White House reached trade deals with multiple trading partners. Despite a cautious stance, several Fed officials have signaled plans for two 25-basis-point rate cuts before the year's end. Markets are currently pricing in an 85% chance of a rate cut in September — a move that would support both the retail sector and the broader economy.

2 Best Choices

We have selected three mutual funds with significant exposure to the retail and discretionary sectors. The funds carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) and are poised to gain from the above factors. Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5000.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors in identifying potential winners and losers. Unlike most fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also the likely future success of the fund.

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).

Fidelity Select Retailing Portfolio fund aims for capital appreciation. FSRPX invests a large portion of its assets in the common stock of companies engaged in merchandising finished goods and services, primarily to individual consumers.

Fidelity Select Retailing Portfolio fund has a history of positive total returns for more than 10 years. Specifically, FSRPX has returned nearly 13.8% and 9.8% over the past three and five-year periods, respectively. Fidelity Select Retailing Portfolio fund has a Zacks Mutual Fund Rank #1 and its annual expense ratio is 0.64%, which is lower than the category average of 1.04%.

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

Fidelity Select Leisure Portfolio fund invests the majority of its assets in common stocks of companies principally engaged in the design, production, or distribution of goods or services in the leisure industries. FDLSX uses the fundamental analysis of factors such as each issuer's financial condition and industry position, as well as market and economic conditions, for its decisions.

Fidelity Select Leisure Portfolio fund has a history of positive total returns for more than 10 years. Specifically, FDLSX has returned nearly 18.8% and 19% over the past three and five-year periods, respectively. FDLSX has a Zacks Mutual Fund Rank #1 and its annual expense ratio is 0.69%, which is lower than the category average of 1.04%.

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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