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Buy 3 Low Risk Mutual Funds as Weak Spending Blurs Growth

U.S. economic growth is expected to lose momentum in the first quarter led by declines in business and consumer spending levels. Weak consumer confidence level also points to slow economic growth in the second quarter.

In this sluggish growth environment, investors must be looking to invest in low risk funds. These funds have fewer risks as they have significant exposure to defensive sectors. Companies in such sectors have the ability to expand steadily and are resilient to economic turbulence.

Business Spending Discouraging

Orders for long lasting U.S. manufactured goods did rebound in March, but a key category that keeps an eye on business investment plans was soft for the second straight month. Orders for nondefense capital goods excluding aircraft remained unchanged in March after a downwardly revised 2.7% decline in February, according to the Commerce Department.

This flat reading suggests that this important gauge of business spending has little or almost no momentum heading into the second quarter. In fact, in the first quarter, this investment category declined 1.1% year over year indicating that spending on machinery, electrical appliances and computers were weak during the said quarter.

Manufacturing has been under constant pressure due to the slump in commodity prices, a stronger dollar and soft demand from abroad reflecting global weakness. Spending cuts by major oilfield service firms including Schlumberger Limited (SLB) and Halliburton Company (HAL) adversely affected factories. These factors in turn rippled through the economy, hampering export growth, business investment and profit margins.

Consumers Reluctant to Spend

The durable goods report added to the recent dismal report on retail sales. Sales at retail stores and restaurants in the U.S. dropped 0.3% in March as people trimmed their spending on car purchases, according to the Commerce Department. Auto sales plummeted 2.1% last month, the steepest decline in more than a year.

The drop in retail sales revealed that consumers have become more cautious about spending this year despite job gains and low gasoline prices. Retail sales are a key barometer of consumer spending, which consists of about two-thirds of economic output in the U.S.

Economy to Barely Increase in Q1

Tepid business and consumer spending levels are collectively expected to weigh on the U.S. economy in the first quarter. The government’s GDP estimate for the first quarter is 0.6%, which is way below last quarter’s growth of 1.4%. Financial behemoths such as JPMorgan Chase & Co. ( JPM), The Goldman Sachs Group, Inc. (GS) and Barclays PLC (BCS) lowered their estimates for first quarter GDP to 0.2%, 0.9% and 0.3%, respectively.

Moreover, when it comes to consumer spending levels, things aren’t looking brighter either. A gauge of consumer confidence level declined in April, a sign of weakening household spending in the near future. The Conference Board’s consumer confidence index fell to a seasonally adjusted 94.2 this month from a downwardly revised 96.1 in March. A separate measure, the University of Michigan’s preliminary consumer-sentiment index fell to 89.7 in April, its lowest level since last September.

3 Low Risk Mutual Funds to Invest In

As weak spending levels point to soft economic growth, it will be prudent to invest in low risk mutual funds. Such funds are immune to the vagaries of the economy since they are heavily exposed to defensive sectors like the utilities, healthcare and consumer staples.

In case of utilities, demand for items such as electricity, gas and water tends to remain stable throughout the year irrespective of the broader economic outlook. Utility companies boast predictable cash flows and generally give dividends to their investors. Similarly, healthcare products and services are also essential. This makes healthcare companies more stable and less susceptible to economic cyclicality. Food, beverages and personal care products too are non-discretionary, which makes investing in consumer staples companies a good proposition.

We have selected three such low risk mutual funds that have given impressive returns in the last three months, boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), offer minimum initial investment within $5,000 and carry a low expense ratio. Funds have been selected over stocks, since funds reduce transaction costs for investors and also diversify their portfolio without the numerous commission charges that stocks need to bear.

Sector – Utility

American Century Utilities Investors (BULIX) invests the majority of its assets in equity securities of companies engaged in the utilities industry.

BULIX’s last three-month return is 11.8%. Annual expense ratio of 0.67% is lower than the category average of 1.25%. BULIX has a Zacks Mutual Fund Rank #1.

Sector – Healthcare

Fidelity Select Health Care (FSPHX) invests a large portion of its assets in securities of companies engaged in the manufacture and sale of products or services used for or in connection with healthcare or medicine.

FSPHX’s last three-month return is almost 2%. Annual expense ratio of 0.74% is lower than the category average of 1.35%. FSPHX has a Zacks Mutual Fund Rank #2.

Sector – Consumer Staples

Putnam Global Consumer A (PGCOX) invests a major portion of the fund’s assets in securities of companies in the consumer staples products and services industries.

PGCOX’s last three-month return is 12.2%. Annual expense ratio of 1.26% is lower than the category average of 1.43%. PGCOX has a Zacks Mutual Fund Rank #1.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the help of Zacks Rank.


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