Mahindra Manulife Mutual Fund has recently launched a business cycle fund. The new fund offer (NFO), an open-ended thematic fund that will invest in companies that will benefit from the business cycle, is available for subscription till September 4, 2023. Krishna Sanghavi, Chief Investment Officer (CIO), Equity; and Renjith Sivaram Radhakrishnan, Fund Manager, equity will co-manage the fund.

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In an exclusive interview with CNBCTV18.com, Sanghavi shed light on the approach behind the new fund and business-cycle funds in general. He explained that the fund focuses on various ways to examine the market, such as market capitalisation (small, mid, and large), flexible capitalisation (flexi-cap), and sectoral categorisation like IT, consumption, and manufacturing. Similar to thematic funds, the business-cycle fund also adopts a thematic approach.

These funds operate by strategically aligning with different phases of the economic cycle, thereby tapping into sectors poised for growth. This strategic alignment considers various economic indicators, including GDP, inflation, interest rates, fiscal deficit, capex cycles, and government policies.

"Unlike more focused sectoral schemes, these funds offer a less risky approach by diversifying across multiple sectors," Sanghavi said.

The features

According to Sanghavi, the distinctive feature of the business cycle fund is its ability to dynamically choose sectors based on relative valuations. He emphasised that the fund acts as an aggregator of different allocations, strategically aligning the economic cycle and market cycle.

This approach involves constructing a portfolio with sectoral preferences that correspond to different stages of the business cycle, aiming to generate long-term capital appreciation.

The returns

The rise of business-cycle funds is evident in the market, with the number of offerings increasing from just one fund in December 2020 to 10 now. Major Indian asset management companies like HDFC, Kotak, Axis, and Aditya Birla Sun Life have introduced their own schemes within this category.

Recent data indicates that business-cycle funds have delivered decent returns. Among the 10 schemes in this category, the HSBC Business Cycles Fund, the oldest one, boasted a one-year return of 19.86 percent. On the other end of the spectrum, the Aditya Birla Sun Life Business Cycle Fund reported a return of 11.40 percent over the same period, according to Value Research.

Here's a look at 6-month returns of some of the business cycle funds:

(Source: Value Research)

Risks and challenges

When addressing potential risks, Sanghavi advised that investing in well-defined thematic funds like the business cycle fund is advisable. He, however, acknowledged the inherent challenges of such funds, underscoring that skilled fund managers continually make strategic sector selections to maximize returns.

To understand, investing in business cycle funds can offer a dynamic strategy that adjusts to changing economic conditions, potentially delivering favourable returns while effectively managing risk. However, it's important to consider certain factors before deciding to invest. These funds might not sustain returns for all investors, given the rapid fluctuations in the business cycle. The success of these funds heavily relies on the expertise of the fund manager, market analysts say.

Given the challenges in consistently generating returns, making incorrect sector selections can significantly impact fund performance. Therefore, potential investors must exercise a high level of caution and make investment decisions based on thorough research and due diligence. If someone is considering these funds, having a long investment horizon is advisable. Alternatively, possessing an in-depth understanding of the specific sector is crucial for accurately timing entry and exit points.

First Published:Aug 23, 2023 1:53 PM IST