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4 Mutual Funds to Buy as Inflation Heats Up

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Headline inflation has moved north in recent times, while last month consumer prices rose at the fastest pace in nearly five years on an annual basis. Producer prices also increased more than expected, pointing to a steady rise in inflation.

Higher cost of goods such as gasoline drove U.S. inflation, offsetting a rise in household income and in due course affecting the purchasing power of consumers. With the recent rise in inflation, we have selected five mutual funds that will safeguard investors against the rise in prices of essential goods and commodities.

Record Rise in Consumer Prices

U.S. consumer prices rose at the fastest pace in February in nearly five years, compared with the same period in 2016, according to the Labor Department. In the 12-month period through February, the Consumer Price Index (CPI) was up 2.7%, its biggest year-on-year gain since Mar 2012. The core CPI measure that excludes volatile food and fuel costs rose 2.2% from last February.

An uptick in gas prices drove overall inflation. A sharp acceleration in what consumers pay as rent, which incidentally increased at the fastest clip last year since 2007, has also pushed inflation higher. Another big expense, the cost of Medicare, too, was the reason for the rise. In 2016, the cost of gas increased 9.1%, while rents posted the biggest advance since mid-2007, rising 3.7%. Medical expenses rose 4.1%, its biggest increase in nine years.

Producer Prices Increase

U.S. wholesale prices, in the meantime, continued to rise in February as the cost of some services like financial advice, legal help and travel increased. The Producer Price Index (PPI) over the last 12 months in February climbed 2.2%, the largest advance since Mar 2012.

Another inflation index known as the personal consumption expenditures price index (PCE) jumped over the last 12 months to 1.9% in January. This marked the highest year-over-year level since Oct 2012. The PCE is a preferred tool for the Fed to measure inflation.

As the rate of inflation is now close to the Fed's 2% long-term target, the central bank raised federal funds rate this month. The Fed raised its federal funds rate to a range of 0.75% to 1% this month (read more: 5 Biggest Winners from the Fed Rate Hike ).

4 Inflation-Protected Mutual Funds to Buy Now

In this situation, where a steady rise in prices of goods and services are threatening to shrink the value of money, investing in inflation-protected bond mutual funds will be a prudent decision. Such funds can serve as a hedge against inflation, while providing steady returns.

We have selected four inflation-protected bond mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive year-to-date and 5-year annualized returns, and initial investments within $5000.

The question here is why should investors consider mutual funds? Reduced transaction costs and diversification of portfolios without the several commission charges that are associated with stock purchases are the primary reasons why one should be parking their money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money ).

BlackRock Inflation Protected Bond ServiceBPRSX invests a large portion of its assets in inflation-indexed bonds of varying maturities issued by the U.S. and non-U.S. governments.

BPRSX's year-to-date and 3-year annualized returns are 1.4% and 1.1%, respectively. The fund's performance, as of the last filing, when compared to funds in its category was in the top 19% in the last one year. BPRSX carries a Zacks Mutual Fund Rank #1.

AI US Inflation-Protected AFNIHX invests a large portion of its assets in inflation-indexed securities that are denominated in U.S. dollars.

FNIHX's year-to-date and 3-year annualized returns are 1% and 1.2%, respectively. The fund's performance, as of the last filing, when compared to funds in its category was in the top 32% in the past one year. FNIHX carries a Zacks Mutual Fund Rank #2.

American Century Inflation Adjusted Bond AAIAVX invests a major portion of its assets in inflation-adjusted debt securities.

AIAVX's year-to-date and 3-year annualized returns are 1.6% and 1.3%, respectively. The fund's performance, as of the last filing, when compared to funds in its category was in the top 23% in the last one year. AIAVX carries a Zacks Mutual Fund Rank #2.

Federated Real Return Bond ARRFAX pursues its objective to invest primarily in investment-grade, inflation-indexed bonds issued by the U.S. government.

RRFAX's year-to-date and 3-year annualized returns are 3.8% and 0.7%, respectively. The fund's performance, as of the last filing, when compared to funds in its category was in the top 11% in the last one year. RRFAX carries a Zacks Mutual Fund Rank #2.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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