Business cycle funds deliver up to 56% returns in last 1-year to outperform broader market

New Delhi: Business cycle mutual funds have been gaining traction in the investment landscape, delivering robust returns of 32-56 per cent over the past year, with schemes from HSBC, Mahindra Manulife, and Quant generating returns exceeding 50 per cent.

These top three funds have substantially outperformed the Nifty 500 TRI index, which delivered 35.11 per cent returns over the same period, according to the industry data.

Currently, the market hosts only 16 business cycle funds, with just three completing a three-year tenure. The category's assets under management (AUM) have surged to Rs 37,487 crore, more than doubling from Rs 17,238 crore in September 2021. This stellar growth suggests the rising investor interest in these funds, Feroze Azeez, Deputy CEO, Anand Rathi Wealth, said.

Business cycle mutual funds try to identify the economic cycle and then pick stocks from sectors that could do well in the respective market conditions.

These funds operate by rotating investments across sectors based on the economy's different phases -- recession, early recovery, mid-cycle growth, and late-cycle slowdown.

For instance, during a recessionary phase, defensive sectors like utilities and pharmaceuticals tend to perform well. In contrast, sectors such as automobiles, financials, and infrastructure see gains in the early recovery phase. This strategic sector rotation has paid off handsomely for investors.

Of the 16 business cycle funds currently available, 10 MFs have a track record of over a year, and all but one have outperformed the Nifty 500 TRI over the past 12 months. These 10 funds have given an average return of 42 per cent, according to industry data.

In the past one-year (till October 17), HSBC Business Cycles Fund has delivered an impressive 56.3 per cent return, closely followed by Mahindra Manulife Business Cycle Fund at 56.17 per cent and Quant Business Cycle Fund at 50.8 per cent.

These three funds have outpaced the benchmark by 15-21 percentage points, delivering robust gains despite economic volatility.

Other performers include Baroda BNP Paribas Business Cycle Fund, which posted a 44.58 per cent return over the past year, followed by ICICI Prudential Business Cycle Fund (42.27 per cent), Tata Business Cycle Fund (41.26 per cent), Kotak Business Cycle Fund (40.03 per cent), Axis Business Cycles Fund (39.02 per cent), Aditya Birla Sun Life Business Cycle Fund (36.33 per cent), and HDFC Business Cycle Fund (31.97 per cent).

Interestingly, over the last six months, these top performers have continued their momentum, with HSBC Business Cycles Fund returning 26.72 per cent, Mahindra Manulife Business Cycle Fund 20.88 per cent and Quant Business Cycle Fund 17.7 per cent.

Moreover, the top three funds have outperformed the Nifty 500 TRI index, which gave 15.2 per cent returns over the same period.

The remaining seven funds have given a return in the range of 13 per cent to 23 per cent during the same period.

Siddharth Alok-AVP Investments, Multi Ark Wealth at Epsilon Group, said business cycle funds are creating buzz, mainly due to their top-tier returns in a short period. This success is largely driven by robust performance in select sectors and themes.

With India's push in infrastructure and manufacturing, many companies have seen a sharp re-rating. Funds with high exposure to these segments have earned substantial returns. Since business cycle funds tend to focus heavily on such themes, they have achieved solid gains, he explained.

The Indian economy has made sectors like defence, energy, ITES, BFSI, and healthcare more attractive, and business cycle funds, which can actively invest across these sectors as cycles change, are a good option for investors seeking high returns with some volatility. These funds also save investors from the hassle of switching between different sectoral funds or timing entry and exit points, said Bhavesh Damania, Founder of Wisdom Edge Investments.

However, since these funds haven't been around for five years, the minimum period for evaluating thematic funds, relying solely on recent performance might not be the best strategy at this point, he added.

Typically, business cycle funds take a top-down approach to identifying phases of economic or sector cycles, while adopting a bottom-up approach to stock selection.

These funds have the flexibility to invest across market capitalisations and do not have a restrictive mandate, thus helping them to gain from broader benchmark rallies.

Moreover, these schemes can take concentrated bets on segments where fund managers have high conviction, thus enhancing the gains during periods of favourable sector trends. Since the sector rotation is dynamically managed, the prospects of a high-risk, high-reward scenario improve. PTI SP BAL BAL