After the troubled 2016 ended on a strong note, mutual fund bigwigs expect to see stock gains this year. President Donald Trump’s market-friendly policies, hike in key interest rate and upward movement in oil prices will be a shot in the arm for financial, technology and energy mutual funds.

Some dividend paying funds also stand to benefit as Trump’s encouraging policies are turning the broader market into one giant bubble, raising possibilities of disenchantment for investors in the near term. Furthermore, to reduce the overall risk of a portfolio, it is prudent to invest in short-term bond funds which fall under the safer section of debt securities due to their short duration and subsequent near-cash status.

How Funds Performed in 2016

The market witnessed two distinct phases in 2016, with a large section of investors struggling until Halloween. After that, there were inflows in the market over the next six to seven weeks. The inflows were mostly driven by Trump’s tax cuts and fiscal stimulus measures, which are expected to propel economic growth.

The S&P 500 was able to conclude a tumultuous year with 12.48% gain, while U.S. diversified stock funds ended the year with an average gain of 10.81% after climbing 4.06% in the fourth quarter, according to Lipper Inc. Small-cap value funds performed the best among U.S. diversified stock funds in 2016, with a return of 26.49%. The top-performing fund with a minimum $100 million in assets was Aegis Value (AVALX - Free Report) , a small-cap value portfolio that soared 70.51%. Small-cap blend funds, in the meantime, were close on the heels with a gain of 21.18%.

While U.S. diversified stock funds rose on an average 1.46% in December, risky assets such as high yield mutual funds advanced 1.76% and ended the year with a staggering return of 13.34%, according to Lipper Inc.’s preliminary numbers. These funds were closely followed by loan participation funds, up 1.18% and 9.08% for the month and the year, respectively.

Thanks to considerable volatility in 2016, precious metals funds surged 54.78% while energy funds closed the calendar with a gain of 15.24%. U.S. taxable bond funds rallied 6.14% while municipal bond funds were barely able to break even, gaining a meagre 0.1%. Investment grade credit funds with A- and BBB- rates, on the other hand, registered a gain of 4.47% and 5.91% for the year.

Fixed income funds also ended last year on a favorable note in spite of some seesaw action by the Fed when it comes to raising rates. The broader market was caught a little off-guard after the Fed came out with a slightly hawkish stance, suggesting a faster pace of rate hike in 2017. The Fed raised the benchmark rate by 25 basis points to a range of 0.5% to 0.75% in December and issued guidance suggesting more rate increases with the strengthening of the U.S. economy.

In fixed income, high-yield bond funds led the way with a 13% return for the year, while emerging-market debt funds clocked a 10% return.

The following diagram shows how U.S. and foreign stock and bond funds performed in 2016:

(Click on image to enlarge)

What’s in the Cards for 2017?

Investors’ optimism this year is mostly driven by expectations that economic growth will improve significantly both in the U.S. and elsewhere. Relaxed regulations under Trump administration will certainly boost the economy, which also bodes well for financial funds. Such funds are also poised to benefit from rising rates, especially the banking sector.

Dividend paying funds generally do fine in a rising rate environment. Such funds provide a buffer against slow share-price gains or price setbacks. Lest we forget, Trump's market-friendly policies also helped major indices scale to record highs. However, this has made stocks substantially pricier from a valuation perspective. This warns us that the markets might be approaching the overbought region which will either be corrected by going sideways or lower. Companies that pay consistent dividends put a ceiling to such uncertainty. These companies have steady cash flows and are mostly financially stable and mature companies, which help their stock prices to increase gradually over a period of time.

If you still want some protection against rising interest rates and fall in stock prices then short-term bond funds are a good choice as they are mostly defensive by nature. Such funds allocate on minimal-risk investment options, including cash, money markets, certificates of deposit (CDs) and bonds.

Faster economic growth, for the time being, drives the technology sector, mostly innovative companies involved in cloud computing, cybersecurity and data storage. Energy companies, in the meantime, are positioned to benefit from the recent OPEC deal to cut production of fuel.

5 Best Mutual Funds to Buy in 2017

Investors mostly rely on mutual funds as the backbone of their investment strategy. And why not? 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 money in mutual funds.

We have, thus, selected five solid mutual funds from the aforementioned areas that are poised to gain considerably this year. Such funds boast a Zacks Mutual Fund Rank #1 (Strong Buy).

Fidelity Advisor Financial Services A (FAFDX - Free Report) invests the majority of its assets in securities of companies principally engaged in providing financial services to consumers and industry. FAFDX, as of the last filing, allocates its funds in one major group – Large Value. The fund, managed by Fidelity, carries an expense ratio of 1.15%, less than the category average of 1.52%. Also, FAFDX requires a minimal initial investment of $2,500. The fund’s 1-year, 3-year and 5-year annualized returns are 33.7%, 7.9% and 13.7%, respectively.

Fidelity Select Energy Service Portfolio (FSESX - Free Report) invests a major portion of its assets in securities of companies principally engaged in the energy service field, including those that provide services and equipment to the conventional areas of oil, gas, electricity, and coal. FSESX, as of the last filing, allocates its funds in two major groups – Large Value and Precious Metal. The fund, managed by Fidelity, carries an expense ratio of 0.81%, less than the category average of 1.49%. Furthermore, FSESX requires a minimal initial investment of $2,500. The fund has given a whopping return of 70% in the last one-year period.

Vanguard High Dividend Yield Index Investor (VHDYX - Free Report) seeks to track the performance of the FTSE High Dividend Yield Index that measures the investment return of common stocks of companies that are characterized by high dividend yield. VHDYX, as of the last filing, allocates its funds in three major groups: Large Value, Large Growth and Intermediate Bond. The fund, managed by Vanguard Group, carries an expense ratio of 0.15%, below the category average of 1.07%. Moreover, VHDYX requires a minimal initial investment of $3,000. The fund’s 1-year, 3-year and 5-year annualized returns are a respective 26.9%, 10.3% and 13.6%.

Fidelity Select Software & IT Services Portfolio (FSCSX - Free Report) invests a major portion of its assets in securities of companies principally engaged in research, design, production, or distribution of products or processes that relate to software.