Consumers have been spending heavily despite the prevailing inflationary pressures. Rising oil prices following the Iran conflict that began in late February have increased the cost of goods, yet the retail industry has remained remarkably resilient.

Retail sales have steadily increased this year, supported by strong consumer demand. Given the current environment, retail and discretionary funds are looking increasingly attractive. Investing in funds, such as Fidelity Select Retailing Portfolio (FSRPX Quick QuoteFSRPX - Free Report) , Fidelity Select Consumer Staples Portfolio (FDFAX Quick QuoteFDFAX - Free Report) and Fidelity Select Consumer Discretionary Portfolio (FSCPX Quick QuoteFSCPX - Free Report) could be a smart move.

Retail Sales Surge

Retail sales climbed 0.9% in May from the previous month after rising 0.4% in April, surpassing analysts’ expectations of a 0.5% increase. This marked the fourth consecutive month of gains. Compared with a year earlier, retail sales were up 6.9% in May.

Much of the growth was fueled by strong household spending on motor vehicles. Sales at auto dealerships increased 1.2%, while non-store retailers, including online sellers, posted a 1.5% gain. Furniture store sales also rose 1%.

Some of the increase was linked to elevated gasoline costs caused by higher oil prices, which reached a four-year high during the Middle East conflict. However, many analysts view the rise as temporary.

Energy prices have recently eased, offering some relief. Consumer confidence also improved in June for the first time in three months. The latest University of Michigan survey showed sentiment rising 9% to a preliminary reading of 48.9.

Oil prices could decline further as the United States announced a peace agreement with Iran that is expected to be finalized soon. The deal would reopen the Strait of Hormuz, a crucial shipping route for global oil transportation.

At the same time, the Federal Reserve kept interest rates unchanged at 3.5-3.75%, following its latest policy meeting. Although policymakers are considering another rate increase later this year, which could pressure retailers, strong consumer demand and robust spending continue to support the sector.

3 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 16.8% and 4.9% 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 0.63%, 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 Consumer Staples Portfolio fund aims for capital growth. FDFAX invests the majority of its assets in securities of companies primarily engaged in manufacturing, marketing, or distributing consumer staples. Fidelity Select Consumer Staples Portfolio fund invests in both U.S. and non-U.S. issuers.

Fidelity Select Consumer Staples Portfolio fund has a history of positive total returns for more than 10 years. Specifically, FDFAX has returned 4.7% and 3.9% over the past three and five-year periods, respectively. FDFAX has a Zacks Mutual Fund Rank #2, and its annual expense ratio is 0.68%, which is lower than the category average of 0.91%.

Fidelity Select Consumer Discretionary Portfolio fund invests the majority of its assets in common stocks of companies principally engaged in the manufacture or distribution of consumer discretionary goods. FSCPX 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 Consumer Discretionary Portfolio fund has a history of positive total returns for more than 10 years. Specifically, FSCPX has returned nearly 18.9% and 7% over the past three and five-year periods, respectively. Fidelity Select Consumer Discretionary Portfolio fund has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.68%, which is below the category average of 92%.

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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