The Federal Reserve’s first interest rate hike in three years has been followed by signals that monetary tightening is likely to continue. On Sept. 16, the central bank raised the federal funds target range by 25 basis points to 3.75-4%, citing elevated inflation and the need to return price growth sustainably toward its 2% goal.
Several Fed officials have since indicated that policymakers still see inflation risks as significant. Boston Fed President Susan Collins said persistent inflation and supply shocks, including geopolitical developments, warranted a more restrictive policy stance. Chicago Fed President Austan Goolsbee said inflationary pressures from higher oil prices and tariffs could prove persistent rather than temporary, warning that additional hikes may be necessary if demand remains strong.
These comments from important Fed officials suggest the central bank is becoming less willing to dismiss energy price increases linked to the Iran war and tariff-related price pressures as temporary supply shocks. Goolsbee has also emphasized that the source of inflation will matter for future policy, particularly if services demand and investment remain strong.
Markets are increasingly reflecting expectations for further tightening. As of Sept. 25, Fed funds futures indicated a roughly 94.3% probability of at least one additional rate increase across the Fed’s final two meetings of 2026. The next scheduled meetings are Oct. 27-28 and Dec. 8-9, leaving policymakers with two opportunities to reassess inflation, employment and broader economic conditions.
Financial mutual funds can benefit from a rising-interest rate environment, particularly those with significant exposure to banks, insurers and other financial institutions. Higher rates can support banks’ net interest margins by allowing them to earn more on loans and investments, while insurers may benefit from higher yields on investment portfolios. Stronger interest income can improve profitability across the financial sector, potentially supporting the performance of mutual funds focused on financial stocks as rates remain elevated.
Against this backdrop, Fidelity Select Banking (FSRBX – Free Report) , T. Rowe Price Financial Services (PRISX – Free Report) and Davis Financial (RPFGX – Free Report) are three financial mutual funds worth considering. These boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive three-year and five-year annualized returns and minimum initial investments within $5000, and carry a low expense ratio.
Mutual funds, in general, reduce transaction costs and diversify portfolios without an array of commission charges that are mostly associated with stock purchases (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
Fidelity Select Banking primarily invests in domestic and foreign banking companies, using fundamental analysis of financial, industry, market and economic factors. It is non-diversified.
Matt Reed has been a lead manager of FSRBX since 2016. Three top holdings for FSRBX are Bank of America (7.6%), Wells Fargo (7.5%) and Citigroup (6.3%).
FSRBX’s 3-year and 5-year annualized returns are 28.9% and 11.8%, respectively, and its net expense ratio is 0.69%. FSRBX has a Zacks Mutual Fund Rank #1. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
T. Rowe Price Financial Services invests primarily in common stocks of financial services companies, using derivatives as appropriate to maintain exposure to its targeted investment focus.
Matt Snowling has been a lead manager of PRISX since 2021. Three top holdings for PRISX are Bank of America (5.5%), Mastercard (4.7%) and JPMorgan Chase (4.5%).
PRISX’s 3-year and 5-year annualized returns are 25.1% and 12.8%, respectively, and its net expense ratio is 0.83%. PRISX has a Zacks Mutual Fund Rank #1.
Davis Financial follows the Davis Investment Discipline, investing primarily in financial services companies through common stocks and depositary receipts.
Christopher Davis has been a lead manager of RPFGX since 2014. Three top holdings for RPFGX are Capital One (9.9%), Wells Fargo (8.5%) and JPMorgan Chase (7.3%).
RPFGX’s 3-year and 5-year annualized returns are 25.3% and 13.3%, respectively, and its net expense ratio is 0.94%. RPFGX has a Zacks Mutual Fund Rank #2.
Bottom Line
These three mutual funds combine favorable Zacks rankings, solid long-term returns and relatively low expenses in an environment where financial mutual funds could gain momentum.
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