Do you want to find investing topics all around India? Do you want to put your money into future market leaders? You might put your money into business cycle funds. It is a thematic equity fund that employs a dynamic allocation strategy across industries, sectors, and market capitalization and rides business cycles. Let’s look at business cycle funds and how they might help market-savvy investors gain more significant returns.
What is Business Cycle Investing?
The economy goes through several phases, including expansion, peak, recession, and collapse, lasting a few months or years. It’s important to remember that the economy does well after a boom or expansion period and underperforms throughout a recession. A business cycle is the progression of the economy through various stages.
A business cycle can be triggered by changes in interest rates or an increase or decrease in inflation. Many investors struggle to forecast when each phase begins and finishes since the duration of each phase varies. On the other hand, business cycle funds can profit as sector performance goes on during the business cycle.
For example, during the expansion and boom phase, the banking and car sectors perform well. However, FMCG and pharmaceuticals are defensive industries that serve well during recessions.
Business cycle fund managers look for industries that may turn around before the business cycle. Automobiles, capital goods, banks, metals, and infrastructure, for example, can all benefit from an expansion phase. Following that, buy companies from these sectors that could outperform.
Stages of Business Cycle
Expansion
Expansion is the first stage of the business cycle. Positive economic indices such as employment, income, profits, output, wages, mutual funds, demand, and supply of products and services are increasing. Debtors are generally on time with their payments, the money supply velocity is substantial, and investment is high. This process will continue as long as economic conditions are conducive to growth.
Peak
When these figures begin to rise outside of their normal ranges, however, the economy is out of control. Companies could expand without considering the hazards. Investors have become overconfident, buying assets at inflated prices that are not backed by their underlying value.
Everything starts to become prohibitively expensive. The apex of all this frantic activity is the peak. Whenever the expansion has come to a halt, production and pricing have reached their maximum levels. With little capacity for growth, the only option is to contract, which is when contraction occurs.
Contraction
The duration between the peak and the decline is lengthened by a contraction. It is a time when economic activity is declining. During a contraction, unemployment rises, equities fall into a bear market, and GDP growth below 2%, indicating that firms have curtailed their operations. The economy is often regarded as a recession when the GDP falls for two consecutive quarters.
Slump
If the cycle’s peak is its highest point, the Slump is its lowest. It usually occurs when the recession, or contraction phase, reaches its bottom and begins to bounce into an expansion phase, resuming the business cycle. The recovery is not always swift, nor is it usually in a straight line, on the route to full economic recovery.
For investors, understanding the business cycle is critical. Knowing which assets (mainly equities) are performing well during the business cycle might help an investor avoid certain dangers and potentially increase the value of their portfolio at any point in the cycle.
Do business cycle funds invest in one sector?
Business cycle funds spread your money across four to five different industries. It’s essential to recognise that these funds shift their investments between sectors when business cycles change. On the other hand, sector funds concentrate their investments in a single industry, raising the risk of concentration.
Business cycle funds have no preference for one industry or market capitalization. It focuses on identifying investment options and managing allocations across business cycles to provide investors with improved returns.
Final Thoughts
Understanding the business cycle is essential not only for workers but also for consumers and investors. You’ll be able to tell whether it’s an excellent time to purchase, sell, or sit on the sidelines.
You’ll also learn how to prepare for the worst-case scenario. If you suspect a recession is on the way, you can adjust your portfolio accordingly. Meanwhile, if you or your advisor believe the worst is about to pass, you can increase your risk.
