Markets bounced back and closed last month on a high, following a bloodbath on Aug 5. However, volatility has returned this month on renewed fears of an economic slowdown, following the release of a spate of weak economic data.

Markets are likely to remain volatile as investors are still unsure about how big the Federal Reserve’s rate cut will be. Investing in utility funds like Fidelity Select Utilities (FSUTX Quick QuoteFSUTX - Free Report) , American Century Utilities Inv (BULIX Quick QuoteBULIX - Free Report) and Fidelity Telecom and Utilities (FIUIX Quick QuoteFIUIX - Free Report) thus appear to be a safe choice.

Volatility Returns on Weak Economic Data

Stocks tumbled on Thursday, with the Dow falling 0.5% and the S&P 500 ending 0.3% lower. The S&P 500 has now ended in negative territory for the third consecutive session.

The decline came as weak jobs data released yesterday heightened concerns about an economic slowdown. Employers hired at a sluggish pace, with private payrolls increasing by only 99,000 jobs in August, marking the smallest gain since January 2021 and significantly below the expected 145,000.

The manufacturing sector has also been struggling in recent months as higher borrowing costs have driven up the prices of raw materials and other expenses, leading to a decline in demand.

The Institute for Supply Management (ISM) reported that its manufacturing PMI increased slightly to 47.2 in August from 46.8 in July. The manufacturing sector makes up 10.3% of the economy. Any PMI reading below 50 signals economic contraction.

Other Factors Impacting Markets

A strong labor market had been the Federal Reserve's biggest hurdle in its effort to control inflation, but signs of a cooling job market have emerged in recent months.

However, job growth in the economy has slowed more than anticipated, fueling concerns about a potential economic downturn.

Although inflation has significantly decreased in recent months, it remains above the Federal Reserve's 2% target. The Fed has hinted at the possibility of beginning its easing cycle soon and is expected to implement its first rate cut this month.

Market participants are anticipating a 25-basis-point rate cut, but the Federal Reserve has not yet provided specifics on the size of the rate cut or how many it plans to implement this year.

These factors could prolong market volatility. In such a situation, investing in utility mutual funds appears to be a wise choice. The funds offer essential stability and growth potential, making them a prudent consideration for savvy investors.

Utility Funds to Avoid Risk

We have 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).

Fidelity Select Utilities fund seeks capital appreciation. FSUTX normally invests at least 80% of its 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 11.2% and 9.6%, respectively. Fidelity Select Utilities fund has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.73%, 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 4.1% and 4.8%, respectively. American Century Utilities Invfund has a Zacks Mutual Fund Rank #2 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.

Fidelity Telecom and Utilities fund seeks high total return through current income generation and capital appreciation. FIUIX primarily invests in common stocks, with at least 80% of assets in securities of telecommunications and utility companies. It invests in domestic and foreign issuers and factors in the fundamental analysis of each issuer's financial condition and industry position, as well as market and economic conditions.

FIUIX’s 3-year and 5-year annualized returns are 10.1% and 8.7%, respectively. Fidelity Telecom and Utilities fund has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.77%, 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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