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.
- It will buy stocks of industry leaders or
businesses that do well when one sector does well. This will happen during
an economic expansion.
- It will invest in businesses from industries
that offer protection against downturns during a contraction phase.
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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