Conventional wisdom says that a rising interest rate environment is beneficial for banks. The traditional banking model revolves around receiving deposits and making loans. Profit is made on the margin, between the interest rate paid to depositors and the interest rate received by borrowers. When interest rates are low, banking margins are squeezed. Rising interest rates increase margins, supporting banks' bottom lines, supposedly driving profitability. Interest rates are expected to rise in 2016, but they are expected to be gradual, according to the Federal Open Market Committee (FOMC). Federal Reserve board members and Federal Reserve Bank presidents, project the annual mean federal funds rate to be 0.9% in 2016, 1.9% in 2017 and remaining low at 3% in 2018. In its March 2016, policy statement, the FOMC stated that monetary policy would remain accommodative to support continuing improvement in the labor market and return inflation to 2%. Annual mean personal consumption expenditure inflation is expected to be 1.2% in 2016, 1.9% in 2017 and 2% in 2018, according to the Federal Reserve board members and Federal Reserve Bank presidents’ projections.

Interest rates are in the first tightening cycle since the mid-2000s, with the Federal Reserve Bank issuing its initial rate rise in December 2015. The federal fund rate, however, is expected to remain considerably low for the foreseeable future, nullifying the effect that interest rate rises have on banks.

Taking the above factors into consideration, the following three mutual funds should be avoided.

John Hancock Regional Bank Fund

The John Hancock Regional Bank Fund Class A (“FRBAX”) was launched in January 1992. The fund invests the majority of its assets in regional banking and lending companies. It typically invests in stocks with various market capitalizations. The fund’s top three holdings include SunTrust Banks Inc. (NYSE: STI) with a 2.87% allocation, JPMorgan Chase & Co. (NYSE: JPM) at 2.84% and Wells Fargo & Co. (NYSE: WFC) at 2.79%.

The John Hancock Regional Bank Fund Class A has net assets of $815 million with an expense ratio of 1.26%, below the category average of 1.55%. It requires a minimum investment of $1,000. The fund had a year-to-date (YTD) return of 2.2%, as of May 25, 2016. This fund has strong exposure to traditional banking companies that are unlikely to benefit from gradual interest rate rises, which are projected to remain low until at least 2018.

Fidelity Select Banking Portfolio

The Fidelity Select Banking Portfolio (“FSRBX”) invests a minimum of 80% of its assets in companies that are involved primarily in banking. The fund was created in 1986 and uses fundamental analysis to select stocks to include in its portfolio. Its top holding is Wells Fargo & Co. with a heavy weighting of 10.49%, US Bancorp (NYSE: USB) has the second-highest weighting at 7.96%, and Bank of America Corporation (NYSE: BAC) has the third-highest weighting at 5.42%.

The Fidelity Select Banking Portfolio has an expense ratio of 0.79% with $625.9 million in net assets. The minimum investment required is $2,500. As of May 25, 2016, the fund has returned negative 0.55%. This fund is top-heavy, with 34.10% of the portfolio represented in its top five holdings — all of which are traditional banking businesses unlikely to reap the benefits of slowly rising interest rates.

Hennessy Large Cap Financial Fund

The Hennessy Large Cap Financial Fund Investor Class ("HLFNX") was formed in 1997 and seeks capital appreciation. It invests the majority of its assets in large-capitalization companies that operate in the financial services sector. The fund is well represented by banks, with Bank of America Corporation and JPMorgan Chase & Co. making up its top two holdings at 5.39 and 5.09%, respectively. Its third-largest holding is Synchrony Financial (NYSE: SYF) at 4.64%.

The Hennessy Large Cap Financial Fund Investor Class has a minimum investment requirement of $2,500 and net assets of $73.7 million. It has an expense ratio of 1.57%, comparable to the category average of 1.55%. The fund had a YTD return of negative 6.51% as of May 25, 2016. It is underperforming the category average of negative 0.28%. Interest rate rises are unlikely to help this fund improve its performance.