Investing in India’s growing economy with business cycle funds

Investing in India’s growing economy with business cycle funds


Understanding the benefits and risks of this investment avenue

As India’s economy continues to grow, mutual fund houses are launching funds based on business cycle themes. Recently, Axis Mutual Fund announced the launch of its Axis Business Cycles Fund, joining HDFC Mutual Fund and Kotak Mutual Fund who have also launched similar funds in the last six months.

What are business cycle funds?

Business cycle funds invest in stocks or sectors that are likely to benefit from the recovery in the economy.

The economy of a country grows and shrinks at distinct periods, and these periods offer investment opportunities. Business cycle funds evaluate stock and sector bets based on the current economic cycle and aim to invest in sectors that will prosper as a result of a change in the business cycle. In equity markets, the sectors that perform well during a recession may underperform during a recovery, so these funds adjust their portfolios accordingly.


How do business cycle funds work?

Many business cycle funds use a hybrid strategy, combining top-down analysis of economic patterns with bottom-up research on stocks that are best poised to benefit from the current economic cycle. Fund managers currently believe that the Indian economy is at the verge of a new capex cycle, with strong balance sheets of corporations, robust domestic demand, and renewed emphasis on production-linked incentives (PLI) schemes.

How have business cycle funds performed?

Although business cycle funds have only been around for a few years, many of them have outperformed the S&P BSE 500 Total Returns Index (TRI) in the last year. The Tata Business Cycle Fund has given the highest returns at 9.36 per cent, followed by the ICICI Prudential Business Cycle Fund with returns of nearly 8 per cent. The portfolio of these funds reflects the belief of fund managers that the Indian economy is in the expansion phase, with a high exposure to the financial and construction sectors.

Funds such as ICICI Prudential Business Cycle Fund, Baroda BNP Paribas Business Cycle Fund and Tata Business Cycle Fund are also overweight on the energy sector.

However, when we look at the portfolio of business cycle funds and a few of the flexi-cap funds, the top five stocks look almost identical. Both the fund categories have top exposure in the financial stocks such as HDFC Bank, ICICI Bank and State Bank of India.

Are business cycle funds the right choice for investors?

While business cycle funds may have the potential for high returns, they also carry a high level of risk. Due to their short history, there is limited data available on their past performance, especially during recessions. As a result, investors may want to consider diversified equity funds or flexi-cap funds instead, due to their long track records of performance.



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