Recent geopolitical tensions in the Middle-East, U.S.-China trade issues and slowing growth in the U.S. economy could drag Wall Street down in the near future.

Therefore mutual fund investors, who wish to outperform broader markets, could find active mutual funds more apt as compared to passive funds.

Passive Funds May Not Be Ideal Right Now. Here’s Why

United States’ relations with Iran and China have only deteriorated during the past couple of months. Recent developments on both fronts paint a rather uncertain picture for the financial markets.

On Jun 24, President Donald Trump signed an executive order that imposes rather “hard-hitting” sanctions on Iran, in retaliation to the latter’s shooting down of an unmanned American drone last week.

These new sanctions prevent Iran’s supreme leader Ayatollah Ali Khamenei and his office from accessing crucial financial resources. In addition, the United States is expected to impose sanctions on Iran’s foreign minister Zarif this week.

This permanently closes the scope of any diplomacy between the two nations, which means that tensions could only rise from here. These rising geopolitical tensions in the Middle-East dragged the broader markets down on Jun 24 and could continue to do so.

Secondly, trade negotiations between United States and China are expected to start ahead of Trump’s trade talks with his Chinese counterpart at the G20 summit later this week.

Investors are clearly seeking a truce to the trade war, which is what propelled the broader markets over the last few weeks. Should the trade talks fail to meet investor expectations, it is unlikely that the markets will sustain the rally.

Lastly, Fed’s likeliness of slashing interest rates this year indicates weak U.S. economic expansion. The latest jobs report (May’s) also adheres to that. According to Goldman Sachs, the Fed "delivered a clear rate cut signal."

Therefore, passive mutual fund investments might not be ideal since these track a specific index’s performance. The current scenario could be pointing toward a plunge in the market indexes, which isn’t good news for passive funds.

Why Invest in Actively Managed Funds?

However, the scenario is ideal for active mutual fund investments, especially in large-capitalization U.S. companies. This is because the majority of these funds outperformed the S&P 500 in 2007, when the stock market took a dip on the first signs of a financial crisis, and again in 2009 during the Great Recession.

Large-capitalization stocks show resilience when faced with a market downturn, by virtue of their size and fundamentals. This is why actively managed mutual funds that invest in large caps are shielded from a market downturn.

Also, actively managed funds can swiftly respond to changing market conditions, which largely help the mutual fund investor to lower risks and improve their portfolio outcome. Active managers can take real-time decisions to under weigh the losing stocks and over weigh the winning ones, giving them an edge over passively managed funds.

Now we come to the second-most vital question: 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).

Our Choices

We have selected three actively managed, large-capitalization mutual funds that you could consider adding to your portfolio. All these funds carry a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have encouraging year-to-date returns. Additionally, the minimum initial investment is less than $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.

T. Rowe Price Equity Income Fund (PRFDX Quick QuotePRFDX - Free Report) aims for high dividend income and capital growth over the long term. The fund invests the majority of its assets in common stocks with a focus on large capitalization and a strong track of paying out dividends or believed to be undervalued.

This Zacks sector – Large Cap Value product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

PRFDX carries a Zacks Mutual Fund Rank #1. The fund has an annual expense ratio of 0.64%, which is below the category average of 1.01%. It has year-to-date returns of 8.6%.The fund has a minimum initial investment of $2500.

T. Rowe Price Global Technology Fund (PRGTX Quick QuotePRGTX - Free Report) aims for long-term capital appreciation. The fund invests the majority of its assets in common stocks of companies that the fund managers expect will generate most of their revenues from the development, advancement and use of technology. The non-diversified fund aims to invest in at least five countries. A minority of the assets invests in foreign stocks, including stocks of companies in emerging markets.

This Zacks sector – Tech product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

PRGTX carries a Zacks Mutual Fund Rank #2. The fund has an annual expense ratio of 0.91%, which is below the category average of 1.29%. It has year-to-date returns of 15.7%.The fund has a minimum initial investment of $2500.

Vanguard U.S. Growth Fund Investor Shares (VWUSX Quick QuoteVWUSX - Free Report) aims to provide long-term capital gain. The fund mostly invests in stocks of large-capitalization American companies that have reasonable stock prices, considering expected earnings and above-average earnings growth potential. The fund invests the majority of its assets in securities issued by American companies.

This Zacks sector – Large Cap Growth product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

VWUSX carries a Zacks Mutual Fund Rank #2. The fund has an annual expense ratio of 0.38%, which is below the category average of 1.07%. It has year-to-date returns of 14.4%.The fund has a minimum initial investment of $3000.

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