What is Business Cycle Fund and should it be in your Portfolio

 

What is Business Cycle Fund and Should you invest in such fund. ??

 

Before we understand Business Cycle Fund, we must understand in brief what is Business Cycle…

 

The four stages of the cycle are expansion, peak, contraction, and trough. Factors such as GDP, interest rates, total employment, and consumer spending, can help determine the current stage of the economic cycle.

 

The classical business cycles are identified as recurrent, alternating phases of expansion and contraction in a large number of economic activities.

 

So by  navigating business cycles accurately, an equity fund can become an all-weather investment vehicle.

 

Business Cycle Fund aims to deploy the business cycle approach to identify economic trends and invest in sectors and stocks that are likely to outperform.

Historical observation and analysis of trends shows that there are  evidences to suggest that the nature of the stocks that do well in one cycle changes in another cycle. In expansion cycle, mid- & small-cap oriented financials, real estate, consumer discretionary, capital goods and industrials outperformed.

During a slowdown, utilities, pharma, FMCG and IT do well. During recession, large-cap oriented utilities, pharma and FMCG outperform. Autos, metals & mining, large financials and IT do well during recovery phase. So, the business cycle theme investing allows a fund to consider aggressive sector over/under weight calls as compared to other diversified funds across different economic phases.

Business Cycle Fund will invest at least 75-80 % of the portfolio as per business cycles theme and the rest in other equities, debt instruments, Gold ETF, REITs and InvITs. The fund also has the flexibility to go overseas for investments and this can be handy in a period of domestic recession.  During times of global recession or crisis, the scheme may also look at investing in Gold ETFs as it can provide some insulation against the downside risk in equity portfolio.

 

Portfolio parameters such as market cap allocation and number of stocks in portfolio will be based on the stage of business cycle. For instance, in a slowdown period, there will be more large-caps, fewer number of stocks as well as sectors. But when the economy is expanding and growing rapidly, large-cap allocation would automatically be lower and the number of stocks would be higher. Portfolio churn will be a function of the frequency of cycle changes.

 

In short

 

Let me explain in simple language , during pandemic (covid) Pharma and health sector and IT sector is out performing other sector because of more demand of medicine and health related item , due to such pandemic Work from Home and online classes concept has increases giving boost to software making sector (IT) sector but such scenario may not continue long and due to government policy  development of facilities /Infrastructure may increase , giving boost to Infrastructure sector and stock price of cement, steel , metal  making companies may  increase . such sector may also witness boom for 1 year or two then may come the time of  Energy sector , Auto sector etc.

 

The Business Cycle fund aims to  allocate and REALLOCATE / REBALANCE  stocks and sectors that will outperform during CURRENT BUSINESS CYCLES AND IN CASE OF GLOBAL RECESSION  THE FUND MAY INVEST IN GOLD ETF etc. giving optimum , all weather proof return on Investment.