Business Cycle Mutual Funds are a relatively new category of mutual funds that focus on adapting their portfolio based on the different phases of the economic or business cycle. These funds aim to capitalize on sectoral and industry trends that perform differently during various stages of the economy, such as expansion, peak, contraction, and recovery.
It is very much proven that all Business Sectors (such as IT, Metal, Healthcare, Banking etc.) are not in demand all the time. Some sectors are in demand in certain time period due to various reasons, like Macro Economic Situation, Govt Policies, Geo-Political situation, Black Swan events like Covid etc. It never remains constant and some other sector becomes trending sector during certain other times.
The business cycle includes four main phases: expansion (growth), peak, contraction (recession), and recovery. Different sectors and industries perform well during different stages of the cycle, and these funds aim to adjust their portfolio allocation accordingly. For instance:
- During the Economic expansion phase, cyclical sectors like banking, automobiles, infrastructure, real estate, and industrials and capital goods , as they tend to perform well when economic growth is robust.
- During the Economic Downturn / Recession, The fund might shift towards defensive sectors like pharma, FMCG, and utilities which are less sensitive to economic downturns and tend to provide stable returns even when the economy slows down.
Dynamic Asset Allocation: The portfolio is rebalanced actively, with fund managers adjusting the sectoral allocation to align with the current stage of the business cycle based on real-time economic indicators such as GDP growth, inflation, interest rates, and corporate earnings.
Advantages of Business Cycle Mutual Funds
- Sector Rotation Strategy: Business cycle funds take advantage of sectoral rotation by focusing on industries expected to benefit from the current economic phase, providing higher growth potential when compared to funds that remain static in their allocation.
- Diversification Across Sectors: Instead of betting on a single sector or industry, these funds diversify across multiple sectors that align with the business cycle, reducing concentration risk.
- Active Risk Management: These funds offer active risk management by shifting towards safer sectors during recessions or downturns, and towards growth-oriented sectors during economic expansion, helping to mitigate volatility.
- Potential for Outperformance: By dynamically adjusting the portfolio based on economic conditions, business cycle funds have the potential to outperform traditional equity funds, especially during volatile or changing market conditions.
Popular Business Cycle Mutual Funds in India
- ICICI Prudential Business Cycle Fund
- Tata Business Cycle Fund
- Aditya Birla Sun Life Business Cycle Fund
- HSBC Business Cycle Fund
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