Just as we have the weather cycle, which includes summer, monsoon, autumn, and winter, the economy goes through Expansion, Peak, Contraction, and Trough cycles. During Expansion, businesses expand rapidly; in the Peak stage, the economy is at its highest point. Contraction is a stage where growth slows down, and in the Trough stage, the economy is at the very bottom.
Factors such as GDP, inflation, repo rates and consumer spending, among others, are used to define business cycles. Read on to know about Business Cycle Funds.
What are Business Cycle Funds?
Business Cycle Funds invest in sectors projected to do well depending on the economy’s stage. For example, sectors such as FMCG and Pharma perform well in Contraction and Trough stages, which are times of recession. On the other hand, banks perform well during the expansion stage. Business Cycle Funds take note of economic cycles and invest in the sectors expected to perform well.
These funds offer good diversification. An investor can invest in a business cycle fund based on factors like risk profile, target allocation etc. In general, Business Cycle Funds are concentric and highly correlated to macroeconomic movements. Since these funds are connected to macroeconomics, they may offer higher volatility during periods of economic uncertainty.
Sectoral Funds vs Business Cycle Funds
Sectoral Funds invest solely in companies that belong to a specific sector or industry, whereas business cycle funds invest in various firms regardless of their sector. When you invest in a Business Cycle Fund, you may see companies belonging to various sectors. To explain it further, while a finance sector mutual fund invests only in companies related to the finance sector, Business Cycle Funds invest in all companies likely to perform well during that economic/business cycle.
Should You Consider Investing in Business Cycle Funds?
In general, fund managers follow a bottom-to-top approach while selecting a stock for the portfolio. In the case of Business Cycle Funds, it’s the opposite. First, fund managers select the sector that is likely to perform well in that particular business cycle. Then they identify the stocks with good fundamentals in that sector. If the fund manager selects the wrong sectors at the wrong time, the fund may suffer. If you are an investor willing to accept calculated risks in exchange for bigger profits, then the Business Cycle Fund may be suitable for you.
Timing is the most important risk factor one should consider when investing in a Business Cycle Fund. The danger of business cycles negatively influencing the returns on investment, an asset class, or an individual company’s profitability, is referred to as cyclical risk. Some firms are highly volatile as compared to others. Such companies fail during a downturn and thrive after the economy has recovered.
Consumer staples focussed on food, power, water, and gas are less subject to economic fluctuations since they are considered necessary purchases even during a downturn. On the other hand, discretionary spending tends to fall during a downturn, affecting consumer discretionary stocks specializing in luxury goods, leisure, and entertainment. Investors should be aware of cyclical risks and use techniques to profit from them.
During periods of economic expansion and cyclical upsurge, Business Cycle Funds have often outperformed wider indexes while reducing downside risks during economic downturns. During times of increased economic uncertainty, Business Cycle Funds are put to the ultimate test. This is when the proactiveness and agility of a select funds’ fund management team enable the funds to stand out from the crowd.
Tata Business Cycle Fund
Tata Business Cycle Fund Direct-Growth is a mutual fund that invests in stocks/equity. This fund was started on August 4, 2021. Murthy Nagarajan, Rahul Singh, and Venkat Samala manage this fund. In the long run, the fund might outperform inflation.
- The NAV of Tata Business Cycle Fund Direct-Growth was 10.9272.
- The fund has Rs 936 Cr in assets under management (AUM), which is less than the category average.
- The fund’s cost ratio is 0.89%.
Business Cycle Funds follow economic cycles, invest accordingly, and use a top-to-bottom approach while selecting stocks. This approach is relatively new to the Indian market. Macroeconomic factors can affect Business Cycle Funds.