Mutual funds: the economic cycle finances a tactical game

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Asset management companies launch business cycle funds that identify economic trends and invest in sectors and stocks at different stages of economic cycles. During the economic recovery phase, these funds invest in cyclical stocks such as small and medium-sized companies and growth-oriented industries. During a downturn, they turn to defensive stocks such as larger, stable companies. These funds follow a top-down approach – first identify the sectors and stocks within them based on macro scenarios and thematic trends.

Business cycle funds take an active investment call on specific sectors and companies based on the fund manager’s assessment of underlying macroeconomic conditions. These funds aim to identify sectors that show signs of growth in their economic cycles and are likely to outperform benchmark indices. These funds can offer investors a good opportunity to ride the economic wave by investing in companies that should take full advantage of the current environment.

Brijesh Damodaran, Managing Partner, BellWether Associates, explains that a fund manager of a business cycle fund will seek to enter before the start of the cycle or in the early stages of the cycle. “The investor is trusting the ecosystem to play. There could be a lag in reading this story if the cycle is not working. These schemes can be part of a tactical portfolio,” he says.

Sector tailwinds
Currently, global markets are witnessing rising inflation and a shift to a high interest rate regime, which favors cyclical sectors such as banks as well as other value themes rather than growth and quality. Rahul Singh, Chief Investment Officer, Equities, Tata Mutual Fund, says the current inflection point in geopolitics is also giving rise to certain structural trends such as the reshaping of global supply chains and the loss of competitiveness of developed economies by relation to India. “This is providing tailwinds to certain sectors in India, especially manufacturing, capital goods and industrials. A business cycle fund would be able to capitalize on these opportunities while still having the flexibility to adapt portfolios to increasingly shorter business cycles,” he said.

Also Read: Saving Rs 200/day for Monthly SIP in These Small Cap Funds Could Have Earned You Rs 31 Lakh in 10 Years

word of caution
The success of the system depends primarily on the ability of the fund manager to accurately time the entry and exit of their positions in relation to changes in the economic cycle. Varun Fatehpuria, founder and CEO of Daulat, a new-age wealth management technology company, says investors should assess the fund manager’s investment track record. “Investors should ensure that there is very little or no sector overlap with their existing holdings to ensure that they are not exposed to the same sectors through these funds. If they are, they better buy the same funds,” he says.

Investors should note that in these funds, the concentration risk is high because they invest in companies belonging to a specific sector or theme, which will limit investments in other sectors. Additionally, there is an element of unpredictable market cycles that could last for long periods of time.

Pranit Arora, CEO and co-founder of Univest, an equity investment platform, says an investor should be careful when choosing these funds because they are cyclical in nature and can perform well when things are going well and disappoint. at other times. “These haven’t been in the market long enough to make a conclusive point about outperformance over a longer period,” he says.

Look at diversified funds
Actively managed equity funds like flexi-cap funds essentially follow a similar unconstrained strategy of placing specific bets on companies/sectors that are positioned to perform well during the current economic cycle. Fatehpuria says that aside from the fact that these funds have longer track records and a lower expense ratio, there are very few reasons why people should invest in business cycle funds. Even Damodaran says that for a new investor, diversified funds should generally be the default option and business cycle funds the tactical options that can add flavor and not the fund of choice. “It’s more for a seasoned investor,” he says.

Surf the wave
These funds aim to identify sectors that show signs of growth in their business cycles
Success depends on the ability of the fund manager to accurately time the entry and exit of their positions in relation to changes in the economic cycle
Concentration risk is high as they invest in companies belonging to a specific sector will limit investments in other sectors

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