Decoding Business Cycle Based Investing: A Ready Reckoner

As an investor, the upcoming financial year provides an excellent opportunity for you to review your mutual fund portfolio and realign it with your personal investor profile and the ongoing trends in the economy. One of the ways of creating a balanced portfolio is to embrace various investment styles and judiciously make them a part of a well rounded portfolio. While at it, take into consideration parameters such as your risk appetite, return requirements, time horizon, and investment goals. Given how macros have been shaping up across the globe and in India, macro-led business cycle-based funds are an interesting proposition in the current market environment. 

What is a business cycle?

A business cycle, or an economic cycle, describes the various stages of fluctuation that plays out between economic expansion and contraction. Comprising four phases, expansion, peak, contraction, and trough—the cycle begins with growth, increased production, and rising employment during expansion. The peak marks the apex of economic activity, characterised by strong indicators but also hinting at a potential slowdown.

Subsequently, contraction, or recession, witnesses declining activity, production, rising unemployment and slowed consumer spending. Finally, the trough, or the bottom of the cycle, reflects the lowest economic activity level. Each phase triggers the next, creating a cyclical progression.

Key aspects of business cycle-based investing 

In mutual funds subscribing to business cycle-based investing, managers strategically position portfolios according to the economic phase one is in, aiming to capitalise on the underlying opportunities and minimise risks. During the expansion phase, fund managers tend to favour cyclical sectors, while during contraction, they lean towards defensive sectors and bonds. 

Business cycle fund, given their nature, comes under the category of thematic equity mutual funds. The fund not only has the flexibility to invest across market caps and sectors to mitigate risks but also can maintain a concentrated portfolio as and when needed. Combining top-down economic analysis and bottom-up stock research, fund managers aim for sector picks aligned with the economic cycle to generate significant alpha. 

In the current scenario, given the robust India growth story, business cycle-based investment portfolios are largely seen emphasising domestic industries driven by strong corporate balance sheets, robust domestic demand, and production-linked incentives. This dynamic approach to portfolio management ensures prompt response  to the evolving economic landscape while optimising investment outcomes, making a business cycle based mutual fund an excellent addition to your portfolio.

Should you opt for this strategy?

You should opt for this strategy only if you have a high-risk appetite and a time horizon of at least three to five years, as this period allows the strategy to play out to its fullest extent. Further, before investing, evaluate the long-term track record of the chosen fund and the manager’s ability to respond to altering market scenarios to ensure optimal results.

Considering the positive outlook on the Indian economy, mutual funds adhering to a business cycle-based investing strategy could offer superior returns and act as a welcome addition to your portfolio in the new financial year. 

By Makesh Sivasankar, Founder Samish Financial Services