WHAT EXACTLY IS A BUSINESS CYCLE?
One thing you must know before investing in the Sundaram Business Cycle Fund NFO is the concept of business cycle. Remember, business cycles are not like typical sectoral cycles of metal stocks or cotton stocks going up with the global prices. Business cycles are more long term in nature and by identifying them early and positioning accordingly, the investors get the option to participate in multi-bagger returns by taking positions in the right theme at the right time. The focus of the fund is on themes, since it is these themes that create business cycles. There are 2 advantages to investing in themes. Most themes, if tapped property, have the potential to outperform the generic market indices. Secondly, most of these themes tend to have low correlation with the overall market and hence also serve as a diversification point. The good thing about themes is that they are sector-agnostic.
LINKING BUSINESS CYCLE THEME AND INVESTMENT STRATEGY
If you look back at history, themes have been very effective at a global level. If you look at some of the big macro themes of the last 50 years like market size expansion of the US, emerging market commodities, Japanese boom, US tech boom or the recent AI book; they are all built on agnostic themes. Here is how some thematic beneficiaries can emerge in India at the current juncture.
The list can go on. The bottom line is that themes open long term opportunities, which is what the Sundaram Business Cycle Fund NFO is trying to tap.
FOUR THEMES TO CURRENTLY BET IN INDIA
There can be numerous themes one can look at, but here are 4 themes to intensely focus on.
The opportunity is huge and today there is also a choice of companies available.
HOW WILL THE FUND GO ABOUT ITS STRATEGY?
Themes appear like the low hanging fruit, but translating them in actionable investment idea is complex. For starters, the Sundaram Business Cycle Fund will adopt a bottom-up approach with focus on stocks first and then using sector and macro data to ratify. The portfolio will largely be about mid-cap stocks with a maximum portfolio size of 45 to 50 stocks. To keep the focus, the fund will only action its investments across 4-5 very critical themes where the tipping point looks imminent. Risk management will hold the key and that will be done by ensuring liquidity and by diversification.
PERFORMANCE OF BUSINESS CYCLE FUNDS IN INDIA
Here is a quick look at how business cycle funds in India have performed over different time frames. We have considered 2 time frames viz. 1-year and since inception. We have considered the Direct Plan returns in all the cases to exclude the impact of the total expense ratios (TER) as these are formula based funds. We have not considered 3 year and 5 year returns as the data was not fully available for majority of the funds. Ranking of the table below is on 1-year returns and all returns pertain to Direct Plans.
Scheme Name |
NAV
Direct |
1 Year (%) Returns | 1-Year Index (%) |
Launch (%) Returns | Index (%) Returns | Daily AUM (₹ Crore) |
Axis Business Cycles Fund | 15.23 | 42.86 | 39.79 | 41.91 | 36.62 | 2,765.46 |
ICICI Pru Business Cycle Fund | 21.80 | 53.37 | 39.79 | 27.85 | 20.92 | 9,420.05 |
Tata Business Cycle Fund | 18.27 | 57.60 | 39.79 | 26.07 | 17.73 | 2,338.36 |
Kotak Business Cycle Fund | 13.94 | 37.38 | 39.79 | 24.25 | 27.22 | 2,505.00 |
HDFC Business Cycle Fund | 13.47 | 33.54 | 39.79 | 23.95 | 23.30 | 2,940.08 |
Baroda Business Cycle Fund | 14.90 | 47.74 | 39.29 | 17.68 | 15.33 | 530.62 |
HSBC Business Cycles Fund | 39.14 | 54.28 | 39.79 | 15.98 | 14.59 | 873.99 |
ABSL Business Cycle Fund | 13.68 | 33.52 | 39.29 | 15.16 | 17.30 | 1,727.58 |
Data Source: AMFI
In the table above provided the performance of business cycle funds across 1-year time frame and since inception. We have also provided the benchmark returns, which are calculated as a diversified portfolio comprising of large cap, mid-cap, and small cap stocks. Business Cycle Funds are not a class of funds, but they are a sub-category within the sectoral / thematic funds and this is classified as a thematic fund, where the theme is to leverage business cycles the make the profit tag as attractive as possible. There are a total of 8 business cycle funds in India managing a total AUM of ₹23,101 Crore, and Sundaram Business Cycle Fund NFO comes at a time when all the 3 indices viz. large cap index, mid cap index and the small cap index are trading very close to their peak levels.
The business cycle funds are a thematic cycle based approach to investing. However, one must bear in mind that this NFO is coming at the peak of the market. Hence, an SIP approach to such a fund is likely to yield better rewards in the long run for investors.
GLANCE AT THE SUNDARAM BUSINESS CYCLE FUND NFO
Here are some details of the Sundaram Business Cycle Fund NFO you must know to decide on investing in the fund.
a. The NFO of Sundaram Business Cycle Fund opens for subscription on June 05, 2024 and will close on June 19, 2024. Being an open-ended equity based fund, it will reopen for sale and repurchase anywhere between 3 days and 15 days of NFO closure. While the fund has no lock-in period (other than exit load disincentive), it is best to hold such business cycle thematic funds for a period of 5 years or more to get full benefits of the underlying business cycle that the fund intends to capture.
b. On the Standard SEBI Risk-O-Meter, the Sundaram Business Cycle Fund will be ranked as a Very High Risk Fund. The high risk is due to the predominant exposure to equities that the Sundaram Business Cycle Fund will have. In addition, there is also the risk of entering into the fund when the market is at all-time high levels. The fund will be a mix of large caps, mid-caps, and small caps; so, fund manager discretion risk also comes into play.
c. The Sundaram Business Cycle Fund is about long term capital appreciation with a focus on large, mid, and small cap stocks. This theme has been observed to outperform the Nifty in India over longer time frames, as we saw in the returns table previously. One risk to be conscious of is that small cap and mid cap stocks tend to have larger drawdowns when markets are falling and also can be more volatile and, occasionally, also subjected to greater regulatory surveillance.
d. Investors can invest in the NFO of Sundaram Business Cycle Fund in minimum size of ₹100 and in multiples thereof. This also applies to switch-ins during the NFO while additional purchases can be in such multiples too. There will be an exit load of 1% on the fund subject to the investors redeeming the funds within 365 days of allotment. There is no exit load beyond 365 days. However, investors are advised to hold business cycle funds for a minimum period of 5-7 years to get full benefits of the theme at work.
e. The Sundaram Business Cycle Fund does not give any guarantee on returns, being an equity oriented fund. The fund has the discretion to spread across sectors and across small cap, mid-cap, and large caps; as long as the business cycle theme is predominantly met. The fund will keep equity exposure in excess of 85% to 90% at all times. It can also partially invest in debt if the opportunities so arise.
f. The Sundaram Business Cycle Fund NFO will offer the growth option and the IDCW (income distribution cum capital withdrawal) option. Within the IDCW option, the fund will offer dividend payout and the dividend reinvestment option. The Sundaram Business Cycle Fund will offer investment via the Regular Plan or through the Direct plan. The NAVs on redemption will be different for regular plans and direct plans based on TER. NAVs of growth funds and IDCW funds will differ by amount of dividends.
g. The fund is best suited for investors with a relatively higher risk appetite and ability to stay invested for 5-7 years in equities. Investors in Sundaram Business Cycle Fund NFO must be prepared for the additional risk of small and mid-cap stocks as well as the estimates of the fund manager on business cycles going wrong. It will be a broad-based fund and hence, the index benchmark will also be broad-based.
h. The performance of the Sundaram Business Cycle Fund will be benchmarked to the underlying Nifty 500 TRI. The TRI (total returns index) is more reflective as it includes the impact of dividends and capital movement. The benchmark will used to evaluate fund performance; although it is advisable to also consider risk-adjusted return measures like Sharpe and Treynor for a more granular picture of risk. The fund managers for the Sundaram Business Cycle Fund are Ratish Varier, S Bharath, and Dwijendra Srivastava.
i. The Sundaram Business Cycle Fund will be classified as an equity fund for tax purposes; with its equity exposure decisively above 65%. The short term capital gains (held for under 1 year) will be taxed at 15% while long term capital gains (held for over 1 year), will be taxed at a flat rate of 10% beyond a minimum threshold exemption of ₹1 Lakh per financial year. There will be no indexation benefits on long term capital gains.
The Sundaram Business Cycle Fund NFO offers an opportunity for investors to participate in a thematic approach to riding the various business cycles through this fund.
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