Should you invest in business cycle funds?
Like the climate, which has seasonal cycles, the economy also goes through cycles. Business cycles are a sort of variation that may be seen in the overall economic activity of a country. A business cycle comprises expansions that occur roughly simultaneously in many different economic regions and sectors, followed by similarly widespread contractions (recessions). The series consists of growth followed by a boom or peak, then recession and troughs (when the economy is in deep depression).
Although not periodic, this series of adjustments occur frequently. These changes can be triggered because of many factors such as inflation, interest rates, government policies, foreign countries' actions and policies, changes in the demand, and supply of money, etc.
Different business cycle phases might appear at various points in time in various economies. Consequently, there may be occasions when a specific business cycle in one economy offers business chances for other economies.
Now, what is a business cycle fund?
A business cycle fund identifies economic trends and invests funds in the sectors likely to outperform by deploying the business cycle approach of investing. During the expansion phase, it'll buy stocks of firms that might benefit from the business cycle or market/sector leaders.
Business cycle funds invest in various companies irrespective of the same sector, while sector funds invest only in one sector-specific sector company. 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 might be positively impacted at any particular phase of the economy.
Advantages of investing in a business cycle fund?
It is critical to comprehend that sector performance fluctuates across an economic cycle. For instance, the financial sector would perform better during the recovery and boom periods. Still, industries like pharma and FMCG will probably perform significantly better than other industries during phases like the recessionary phase. For example, the pharmaceutical and communications industries were profitable throughout the pandemic even while the economy was in a slump.
A fund manager is better positioned to decide due to the large research team at his disposal because not all the companies in a sector would perform well even at the best of times. Investors can feel secure knowing that their portfolios will be strong enough to ride through market cycles and take advantage of market opportunities thanks to this investing strategy.
The scheme's investment goal is to produce long-term capital appreciation through allocation between sectors and stocks at various business cycle stages while investing with an emphasis on riding business cycles.
Business cycles have gotten shorter, and a portfolio must respond swiftly to shifting conditions.
Risks involved in a business cycle fund
The major risk in investing in business cycle funds is timing. The phases in the business cycle might change quickly, and in this situation, the fund managers have to consider the changes and make appropriate investment calls.
Another risk is a cyclical risk. It 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.
Should you invest in business cycle funds?
The decision is subjective, but it is important to keep in mind the returns and risks involved. You can take calculated risks to exploit the profits offered by the funds.
If you are a new investor, staying away from thematic funds and investing in diversified equity funds will be better. To know more, you can contact us.
This blog is purely for educational purposes and not to be treated as personal advice. Mutual funds are subject to market risks, read all scheme-related documents carefully.
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