Per the latest report from the Institute of Supply Management (ISM), service activity for the month of August surged for the 103rd month on the trot. Steady growth in 16 out of the 18 key non-manufacturing industries boosted service sector activity last month.

Steadiness in the metric, which tracks the performance of service-focused companies in America, points toward a strengthening economy. Hospitals and healthcare service providers, retailers as well as restaurants exhibited growth last month. Under such circumstances, investing in mutual funds having significant exposure to services-related companies may prove prudent.

A Burgeoning Service Sector in the United States

The Institute of Supply Management reported on Sep 6 that non-manufacturing activity for August came in at 58.5%, surpassing the consensus estimate of 56.3% and the previous month’s figure of 55.7%. A reading above 50 indicates expansion in the sector. And a reading above 55% is considered phenomenal.

Firms across America complained that trade war woes and threats pertaining to the imposition of newer tariffs have actually pushed up prices of raw materials. The paucity of skilled labor was pointed out as another hindrance to development. However, a flourishing domestic economy and robust demand more than made up for such adversities.

A Spur in Business Activity and New Orders

Non-manufacturing inventories index increased 53.5% in August. This marked the seventh consecutive month of increase. Moreover, the Business Activity Index registered growth of 60.7% in August to report growth in business activity for the 109th consecutive month. Notably, of the 15 industries surveyed, 14 reported an increase in business activity for the month.

Looking at the other positive developments from the report, the non-manufacturing New Orders Index surged to 60.4%. This represents an advancement for 91 straight months that too at an accelerated rate when compared with July. Finally, the non-manufacturing Employment Index surged to 56.7%, expanding for the 54th straight month.

3 Best Choices

We have, thus, selected three service-related mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) that are poised to gain from such factors. Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5000.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds.

Fidelity Select Leisure Portfolio (FDLSX - Free Report) invests a bulk of its assets in securities of companies engaged in the design, production or distribution of goods or services in the leisure and recreation industries. The fund seeks growth of capital and invests both in U.S. and non-U.S. companies.

This Sector – Other product has a track of positive total returns for more than 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 7.9% and 12.3%, respectively.

FDLSX has an annual expense ratio of 0.77%, which is below the category average of 1.17%.

Fidelity Select Health Care Services Portfolio (FSHCX - Free Report) invests a large chunk of its assets in companies that either own or are involved in operating hospital and nursing homes, and are related to the healthcare services sector. FSHCX seeks appreciation of capital. The fund invests in securities of both U.S. and non-U.S. companies.

This Sector – Health product has a track of positive total returns for more than 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 10.5% and 16.1%, respectively.

FSHCXhas an annual expense ratio of 0.76%, which is below the category average of 1.25%.

T. Rowe Price Financial Services (PRISX - Free Report) seeks both capital growth and current income. The majority of its assets are invested in financial services sector companies. It may also purchase securities of companies involved in providing financial software. The fund uses fundamental bottom-up analysis in order to select securities.

This Sector – Finance product has a history of positive total returns for more than 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 10.3% and 12%, respectively.

PRISXhas an annual expense ratio of 0.85%, which is below the category average of 1.40%.