Puneet Sharma
Economies go through business cycles. Each business cycle comprises of a boom and slump in the extremities, along with few smaller stages of cycles in between.Generally, a complete market cycle constitutes of growth, recession, slump and recovery. Some of the economists identify these stages in the form of stages namely early-cycle phase, mid-cycle phase, late-cycle phase and recession phase.
Essentially, a cycle reflects the fluctuations in economic activity, which in turn has a bearing on corporate revenue and profits. For instance, in a growth phase, a company’s revenue and profits are rising, factories are working across several shifts and some are even adding capacity. Typically, growth is a phase of business expansion, rising employment,employee wages and strong credit growth. Now, coming to slump phase. Some of the notable characteristics of this phase include weak demand for goods and services, factories tend to have idle capacity riddled with poor utilisation, lull in employment and subdued credit expansion. As can be seen here, each phase of the cycle calls for a different investment strategy in order to help maximise returns.
Investing based on business cycle is no easy task for a lay investor. Changes in business cycles are a function of interest rates, credit growth, capital expenditure, new infrastructure projects, and many more factors. A keen knowledge of macroeconomic indicators, both domestic and global, and how various sectors have historically performed at various points in the business cycle, is needed to make a winning investment.
Business cycle investing hinges largely on choosing the right sectors at the right time. It is not necessary that all sectors move in tandem and in the same direction. What is required is picking the right set of sectors and then picking the winning names in each of these sectors. Hence, the investment proves to be top-down in nature.
Investors have a variety of offerings based on business cycle to choose from. One of the consistent names here is the ICICI Prudential Business Cycle Fund. The fund has a three-year track record and has delivered stellar returns thus far. A monthly investment of Rs 10,000 through SIP since inception would amount to a total investment of Rs 3.6 lakh. As of Jan 1, 2024, the value of that investment would be Rs 5.23, i.e. a CAGR of 26.8%.
(The writer is Mutual Fund Distributor).
