Mutual Funds: Business cycle funds a tactical play
By funding businesses that profit from the current business environment, these funds give investors the chance to ride the economic wave.
Asset management firms are introducing business cycle funds, which track economic trends and make investments in sectors and equities at various business cycle stages. These funds invest in cyclical companies, including midsize and small businesses, and growth-oriented industries throughout the economic recovery period. They switch to defensive equities, such as those of more established companies, during a downturn. These funds use a top-down approach, which means that they start by figuring out the industries and companies that make up each one based on macroeconomic projections and common themes.
Based on the fund manager's analysis of the underlying macroeconomic conditions, business cycle funds make active investment decisions in particular industries and companies. These funds focus on industries that are anticipated to beat benchmark indexes and exhibit growth during their business cycles. Investors may be able to make a lot of money with these funds by putting their money into businesses that are expected to do well in the current economic situation.
According to Brijesh Damodaran, managing partner of BellWether Associates, a fund manager of a business cycle fund will want to join before the cycle normally begins or during the early phases of the cycle. "The investor believes the ecosystem will work out. If the cycle does not function, the story's progression can be delayed. These plans might be included in a tactical portfolio, he claims.
Sector tailwinds
Global markets are currently seeing an increase in inflation and a change to a high interest rate environment, which benefits cyclical industries like banks and other value-oriented themes over growth and quality. According to Rahul Singh, chief investment officer for equities at Tata Mutual Fund, the current geopolitical inflection point is also causing structural changes like reorganising global supply chains and a decline in competitiveness for Western nations compared to India. "This gives several Indian industries, particularly manufacturing, capital goods, and industrials, tailwinds. A business cycle fund would be able to take advantage of these chances and benefit from the freedom to modify portfolios in response to economic cycles that are getting shorter and shorter, he claims.
Word of caution:
The fund manager's ability to precisely time the entrance and departure of their holdings in relation to changes in the business cycle is largely responsible for the scheme's success. Investors should consider the fund manager's historical track record of successful investments, according to Varun Fatehpuria, founder and CEO of Daulat, a modern wealth-tech company. To guarantee they are not exposed to the same industries through these funds, investors should make sure there is very little to no sectoral overlap with their current holdings. If so, they would be better off purchasing the identical funds, he claims.
Investors should be aware that these funds carry a high concentration risk since they invest in businesses that fall under a certain industry or theme, which restricts their ability to make investments in other industries. Also, it's possible that unexpected market cycles could last for a long time.
As these funds are cyclical in nature and may perform well when the going is good and disappoint at other times, an investor must be careful when selecting them, according to Pranit Arora, chief executive officer and co-founder of Univest, a stock investment platform. According to him, "These haven't been on the market long enough to draw any firm conclusions regarding outperformance over a longer period of time."
Look at diversified funds.
Flexi-cap funds, which are actively managed equity funds, essentially follow a similar unrestricted approach of making particular bets on industries and firms that are expected to do well throughout the current economic cycle. According to Fatehpuria, there are relatively few reasons for investors to immediately begin investing in business cycle funds, despite the fact that these funds have a longer track record and a lower expense ratio. Even Damodaran agrees that for a novice investor, diversified funds should generally be the default choice, and business cycle funds are tactical choices that can offer variety rather than the default fund. It's more geared toward experienced investors, he claims.
