The 5 Best Mutual Funds to Buy for 2016

With the market likely headed toward choppier waters in the coming year, nailing down the best mutual funds to buy for 2016 is no easy task. But there are a handful of funds that will likely fare better than most.

The 5 Best Mutual Funds to Buy for 2016To close out the year, the Fed’s first rate hike in nearly 10 years set a tone of uncertainty and caution. But investors will likely calm their nerves once they see that higher rates don’t mean a new bear market is imminent.

Typically, the first rate increase has been a signal that the economy is in recovery mode, and on average, capital markets have responded positively in the year or two after the first hike.

With that said, higher rates can place downward pressure on commodities and emerging markets.

Also in 2016, investors will likely lose their appetites for risk. Therefore other areas to avoid might be small-cap stocks and high-yield bond funds.

So now we have the stage set to reveal five of the best mutual funds to buy in 2016.

Best Mutual Funds to Buy in 2016: Vanguard 500 Index (VFINX)

Best Mutual Funds to Buy in 2016: Vanguard 500 Index (VFINX)Expenses: 0.17%, or $17 for every $10,000 invested
Minimum Initial Investment: $3,000

In a year of uncertainty and potential for volatility, investors are wise to buy a low-cost, diversified index fund like the Vanguard 500 Index (VFINX) that holds big, high-quality stocks.

Some of these large-cap stocks include Apple (AAPL), Microsoft (MSFT) and General Electric (GE), which are solid choices for 2016, and are VFINX’s top holdings.

Although some of the best actively managed mutual funds (and a few select sector funds) are likely to be top performers in 2016, passively managed funds like VFINX are smart choices because of their diversity. Therefore we begin our list of best mutual funds for 2016 with soundness prioritized a step above strategy.

Best Mutual Funds to Buy in 2016: T. Rowe Price Financial Services (PRISX)

Best Mutual Funds to Buy in 2016: T. Rowe Price Financial Services (PRISX)Expenses: 0.87%
Minimum Initial Investment: $2,500

Rising interest rates can be beneficial for some financial stocks and T. Rowe Price Financial Services (PRISX) is one of the best mutual funds to cover the sector.

The financial services sector consists primarily of banks, credit card companies, insurance companies and brokerage firms. PRISX covers much of this ground with big financial firms like Citigroup (C), JPMorgan Chase (JPM) and State Street (STT).

Rising rates won’t necessarily pose a problem for funds like PRISX because financial companies like banks can charge more for lending. This can increase the spread between lending rates and the rates paid on deposits.

As for historical performance, PRISX has done a good job of maintaining a consistent top-third percentile rank for returns over the past decade compared to other financials sector funds.

Best Mutual Funds to Buy in 2016: Vanguard Health Care (VGHCX)

Best Mutual Funds to Buy in 2016: Vanguard Health Care (VGHCX)Expenses: 0.34%
Minimum Initial Investment: $3,000

The healthcare sector was a market leader in 2015 and funds like Vanguard Health Care (VGHCX) can extend that lead into 2016 and beyond.

VGHCX covers a wide range of health stocks and isn’t too heavily allocated to the volatile healthcare sub-sector of biotechnology. The portfolio offers a well-diversified mix of large-cap healthcare stocks, including Bristol-Myers Squibb (BMY), Allergan (AGN) and UnitedHealth Group (UNH).

With one week remaining in 2015, VGHCX was up 11.7%, which ranks ahead of 85% of the healthcare category of funds and smashes the 1.1% gain for the S&P 500 for the year.

Healthcare stocks are also a good defensive play, should the broader market enter a new bear market.

Best Mutual Funds to Buy in 2016: Fidelity Select Retailing Portfolio (FSRPX)

Best Mutual Funds to Buy in 2016: Fidelity Select Retailing Portfolio (FSRPX)Expenses: 0.81%
Minimum Initial Investment: $2,500

Although consumer spending didn’t quite reach the elevated expectations for 2015, the consumer discretionary sector had a good year and can very well be a leader in 2016.

One of the best mutual funds to cover the top consumer and retail stocks is Fidelity Select Retailing Portfolio (FSRPX). The historic performance record for FSRPX is simply unmatched in the consumer discretionary sector. Performance ranks for year-to-date, one-, three-, five-, 10- and 15-year returns are all first percentile. In other words, the fund beats 99% of category peers in every time frame imaginable.

However a strength of FSRPX is a potential weakness: The top five holdings — which were recently Amazon (AMZN), Home Depot (HD), Priceline (PCLN), Netflix (NFLX) and O’Reilly Automotive (ORLY) — represent 50% of the entire portfolio.

So if you don’t mind taking a bit of added risk with a concentrated portfolio, and you want to tap into the strength of the U.S. consumer in 2016, FSRPX can be a good choice.

Best Mutual Funds to Buy in 2016: Vanguard Intermediate-Term Investment Grade (VFICX)

Best Mutual Funds to Buy in 2016: Vanguard Intermediate-Term Investment Grade (VFICX)Expenses: 0.20%
Minimum Initial Investment: $3,000

Most investors are wise not to ignore fixed income in 2016, but the best bond funds will need to strike a balance between yield and quality. One of the best mutual funds to do this is the Vanguard Intermediate-Term Investment Grade Fund (VFICX).

Short-term bond funds have lower relative interest rate risk, but also lower yields than intermediate-term bond funds. And long-term bond funds have higher interest rate risk than investors should expose their portfolios to in 2016. Also, high-yield bonds are likely to stay under pressure from rising interest rates and declining risk appetites.

And since U.S. Treasuries are still paying next to nothing, the sweet spot for bond mutual funds in 2016 is likely to be intermediate-term bonds with an average credit quality of investment grade. VFICX strikes this balance well with a large portfolio of over 2,000 bonds, most of which are corporate bonds from companies like Apple, HSBC (HSBC) and Medtronic (MDT).

By the last week of December, the year-to-date gain for VFICX was 1.5% for 2015, which beat 99% of corporate bond funds and was comfortably ahead of the 0.6% gain for the Barclays Aggregate Bond Index.

Like most of the other mutual funds in this list, VFICX can continue its positive momentum in 2016 because the economic and market environment won’t likely change much.

As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. However he holds VFINX in some client accounts. His No. 1 holding is his privately held investment advisory firm in Hilton Head Island, SC. Under no circumstances does this information represent a recommendation to buy or sell securities.

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