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4 Financial Funds to Benefit From a Likely March Rate Hike

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On Jan 31, the Federal Reserve opted to leave benchmark rates unchanged within the 1.25-1.5% range. In its two-day Federal Open Market Committee (FOMC) policy statement the Fed indicated that economic activity has increased at a “solid rate” and will continue to grow at a “moderate pace.”

Additionally, per the statement, labor market will remain strong, while inflation will likely “move up” in 2018 and reach the desired 2% rate in the “medium term.” The FOMC also said federal funds rate is likely to increase at a “gradual” pace in the coming months.

The Fed’s statements also indicate a rate hike in March. Officials from the Fed believe that economic growth has been solid and inflation will increase more than anticipated. Consumers and businesses had already helped the U.S. economy expand at a healthy pace for a third straight quarter late last year.

In a post-meeting statement, the Fed mentioned that inflation is “expected to move up” in the next 12 months. It further stated that all inflation-related measures “have increased in recent months.” Interestingly, they had denied the same in their December statement.

Likely Gainers from a Rate Hike

Non-banking financial institutions, including insurance companies, asset managers and brokerage firms, would also benefit. A surge in interest rates also boosts profits for the bank by increasing the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.

A hike in interest rates boosts gains for insurance companies as well. Such companies derive their investment income from premiums received from policyholders in corporate and government bonds. Further, in response to a rise in interest rates, yields and coupons on such bonds increase substantially. This enables life insurers to invest their premiums at higher yields and earn more, expanding their profit margins.

Brokerage firms and asset managers also gain immensely from a rising rate environment since an increase in rates generally concur during periods of economic strength and upbeat investor sentiments.

4 Financial Mutual Funds to Buy Now

Given such positives, we have highlighted four mutual funds poised to gain significantly from Fed’s positive economic outlook and its decision to keep interest rates unchanged for the time being. These funds also carry a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have encouraging three and one-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 to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on 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 Advisor Financial Services A (FAFDX - Free Report) invests the majority of its assets in securities of companies principally engaged in providing financial services to consumers and industry. The fund invests in securities of both U.S. and non-U.S. companies.

This Sector - Finance product has a history of positive total returns for over 10 years. Specifically, the fund's returns are over the three and five-year benchmarks are 11% and 15.1%, respectively. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

The Fidelity Advisor Financial Services fund, as of the last filing, allocates its assets in top two major groups; Large Value and Small Value.

FAFDX has a Zacks Rank #2 and an annual expense ratio of 1.12%, which is below the category average of 1.46%. The fund has three and one-year returns of 15.7% and 27.4%, respectively.

Fidelity Select Brokerage & Investment Management (FSLBX - Free Report) seeks capital appreciation. The fund invests a minimum of 80% of its assets in common stocks of companies involved in stock brokerage, commodity brokerage, investment banking and other financial services. It invests both in U.S. based and non-U.S. based companies.

This Sector - Finance product has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 7.8% and 14.4%, respectively. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

The Fidelity Select Brokerage & Invmt Mgmt fund, as of the last filing, allocates its assets in top two major groups; Large Value and Small Value.

FSLBX has a Zacks Rank #2 and an annual expense ratio of 0.80%, which is below the category average of 1.46%. The fund has three and one-year returns of 12.6% and 34.1%, respectively.

Fidelity Select Insurance Portfolio (FSPCX - Free Report) seeks capital appreciation. The fund normally invests at least 80% of assets and in no event less than 25%, in securities of companies principally engaged in underwriting, reinsuring, selling, distributing, and placing insurance.

This Sector - Finance product has a history of positive total returns for over 10 years. Specifically, the fund's returns are over the three and five-year benchmarks are 12.2% and 17.4%, respectively. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

The Fidelity Select Insurance Portfolio Fund, as of the last filing, allocates its assets in Large Value stocks.

FSPCX has a Zacks Rank #2 and an annual expense ratio of 0.79%, which is below the category average of 1.46%. The fund has three and one-year returns of 16.4% and 19.6%, respectively.

T. Rowe Price Financial Services (PRISX - Free Report)  seeks both capital growth and current income. The majority of its assets are invested in companies in the financial services sector. It may also purchase securities of companies involved in providing financial software. The fund uses fundamental bottom-up analysis in order to select securities.

This Sector - Finance product has a history of positive total returns for over 10 years. Specifically, the fund's returns are over the three and five-year benchmarks are 11.4% and 16%, respectively. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

The T. Rowe Price Financial Services fund, as of the last filing, allocates its assets in Large Value stocks.

PRISX has a Zacks Rank #1 and an annual expense ratio of 0.88%, which is below the category average of 1.46%. The fund has three and one-year returns of 16.3% and 24.4%, respectively.

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