Consider these 9 things before investing in mutual funds!
What is the right way to invest in mutual funds? How do mutual funds work? What kind of risk is involved? Which fund is right for whom? What things should be kept in mind before investing? Watch this video to know-
There was a buzz in the markets when Tata Mutual Fund had filed a scheme information document with the market regulator Sebi on July 7, 2021, to launch Tata Business Cycle Fund. A business cycle fund is not something new in the mutual fund industry.
At the moment, this category includes two funds from two mutual fund houses: L&T Business Cycles Fund and ICICI Pru Business Cycle Fund. The L&T Business Cycles Fund was introduced in 2014. ICICI Prudential Business Cycles Fund, on the other hand, was launched in January 2021 and raised Rs 4,198 crore during the NFO period.
What is a business cycle fund, and how does it work?
Business cycle funds are the ones which follow business cycles having few sectors that are expected to do well based on the phase of the economy without considering any other objectives.
“The business cycle fund allows the fund to consider aggressive sector over/underweight calls as compared to other diversified funds across different economic phases. Portfolio parameters like portfolio churn, market cap allocation, number of stocks in the portfolio too will be based on the stage of the business cycle,” explained Kapil Goenka, Director at C M Goenka Stock Brokers.
Business cycle funds offer a good diversification proposition within equity portfolios. One can invest in business cycle-oriented funds in line with their risk profile, investment profile, and consequent target allocation.
“Business cycle funds are typically concentric and highly correlated to broader macro-economic developments. Given the high degree of correlation to macro-economic developments, these funds may exhibit relatively higher volatility during times of heightened economic uncertainty,” said Anand Dalmia, co-founder, Fisdom.
How is a business cycle fund different from a sectoral fund?
Business cycle funds invest in various companies irrespective of the same sector, while sector funds invest only in one sector-specific sector companies.
For instance, a technology sector mutual fund will invest only in technology-related companies. In contrast, a business cycle fund will invest in all those companies that will positively impact any particular phase of the economy, like expansion, peak, contraction, or trough.
Should you invest?
This is a new theme whereby the scheme aims to deploy the business cycle approach to identify economic trends and invest in sectors and stocks that are likely to outperform. Typically, these funds follow the top-down approach to investing.
“India is basically a bottom-up stock picking market, and a new theme like business cycle funds are not tested through a complete economic cycle. Investors who are willing to invest in these kinds of funds should be aware of a possibility of moderate to high losses even though the overall market is performing better,” pointed out Manish Hingar, founder, Fintoo.
“I suggest that this theme is suitable for investors who prefer to take selective bets for higher returns along with commensurate risks,” continued Hingar.
Timing risk
The major risk in investing in business cycle funds is timing. Cyclical risk is the risk of business cycles or other economic cycles adversely affecting the returns of an investment, an asset class, or an individual company’s profits. “Some companies are more volatile than others, struggling during an economic slowdown and excelling when a recovery is underway. Investors are urged to keep tabs on cyclical risks and employ strategies to profit from them,” pointed out Goenka.
Business cycle funds have typically outperformed broader indices during phases of economic expansion and cyclical uptick while mitigating downside risks during economic slumps, meaningfully. “Business cycle funds are put to the true test during times of heightened economic uncertainty. This is when the proactiveness and agility of the fund management team of a few funds in the segment help the funds outshine the rest,” said Dalmia. L&T business cycles fund being the oldest has given returns of 59.43% and 12.02% over one year and three years.