Investors’ elation at the current bull run has caused many mutual fund houses to be optimistic and come out with new fund offers (NFOs). You will find every other mutual fund house coming out with an NFO in the equity or debt fund category, thus hinting at their intent to dive deeper into the market and earn returns on investors’ money.
A recent example is Quant Mutual Fund house coming out with Quant Business Cycle Fund on May 12, 2023. The fund offer will remain in vogue till May 25, 2023.
While personal financial experts claim that investors must refrain from putting their earnings in NFOs citing myriad reasons, many new-age investors continue investing in them to avail of the benefits of buying at a lower net asset value (NAV) in a bid to gain from more numbers of units in the long run.
While apprehensions against showing interest in NFOs continue, many investors continue to ask if they should consider investing in business cycle funds in the current market scenario. The query stems from the understanding of how many asset management companies (AMCs) in India have launched similar mutual fund offers in the past year.
Rishabh Parakh, Chief Play Officer, NRP Capitals explained, “Business cycle funds aim to take advantage of the different stages of the business cycle by allocating investments across sectors and stocks. These funds typically perform well when there are clear cycles in the economy, with distinct periods of expansion and contraction.”
“If you believe that the current market scenario is characterized by well-defined business cycles and you have confidence in the fund manager's ability to identify and navigate these cycles effectively, a business cycle fund may be worth considering. However, it’s important to note that accurately timing the market and consistently predicting business cycles can be challenging, even for experienced professionals,” added Parakh.
Furthering the debate on who may invest in business cycle funds, Viral Bhatt, Founder, Money Mantra said, “Business cycle funds can be a good option for investors who are looking to generate long-term capital appreciation by investing in sectors and stocks that are likely to outperform at different stages of the business cycle. However, it is important to note that business cycle funds can also be volatile, and investors should be prepared for short-term volatility.”
Adding to your investments?
Yet, there are many investors for whom the ever-changing market cycles do not affect their perspectives on investment. They are here for the long haul and are concerned with investing in high-yield funds that can help them accumulate a decent corpus in the next two decades or more. They are only inclined to know if they must have this kind of fund in their investment portfolios.
Bhatt adds, “Whether or not it makes sense to include a business cycle fund in one's investment portfolio also depends on the individual investor's circumstances. For example, investors who have short-term time horizons or short-term financial goals or are close to retirement may want to avoid business cycle funds due to their volatility. However, investors who have a long-time horizon and are looking for growth potential may find that business cycle funds can be a valuable addition to their portfolio.”
Parakh calls for deep introspection before adding any new fund to an existing portfolio. Undoubtedly, business cycle funds have performed well in the past. However, this does not warrant adding on any new such fund for the sake of investing.
He shared, “Whether it makes sense to include a business cycle fund in one's investment portfolio depends on your investment objectives and overall portfolio diversification strategy. Adding a business cycle fund can potentially provide diversification benefits by investing across different sectors and adapting to changing economic conditions. It can also offer the opportunity for enhanced returns during specific phases of the business cycle.”
There are lots of pros and cons that investors may regard before deciding when and where to put their money for better returns.
Parakh added, “One must consider the potential risks and drawbacks. Business cycle funds tend to be more active and tactical in their investment approach, which can increase volatility compared to more passive investment options. Additionally, if the fund manager’s ability to accurately predict and respond to business cycles is not consistently effective, it could lead to underperformance.”
Dev Ashish, a SEBI-Registered Investment Advisor and Founder (Stable Investor) elucidated, “Business Cycle funds, are expected to benefit from correctly timing their entries and exits into the business cycle of various sectors. It's like trying to be at the right place at the right time. And while this sounds glamorous on paper, the reality is that this is extremely difficult to time the entries and exits correctly, that too consistently all the time given the nature of business cycle funds. And as per the AMC or fund manager handling such funds, these funds may have the potential for higher returns, the actual reality doesn’t make a case for them given the high level of risk that comes from such an approach."
Ashish added, "Also, most existing funds in categories like flexicap funds, focused funds, and large & midcap funds tend to take business cycles into account. And there are reasonably high overlaps of many of the existing business cycle funds’ portfolios’ top stocks with those of flexicap funds. So, for most investors, having well-run diversified funds with a strong track record is better than unnecessarily getting into another category of business cycle funds.”
How you view your investment goals should be the deciding factor when choosing investments. Aggressive investors do not mind experimenting with their investments even if it means high churning of their money or subjecting their investments to high volatility. The risk-averse must stay put and check for various factors before deciding which option earns them the most while not losing their capital.