In a bid to simplify the mutual fund landscape and streamline the investor experience, the Securities and Exchange Board of India (SEBI) implemented a rule in 2017, restricting mutual fund houses to having just one fund in each category. This move aimed to alleviate the confusion faced by potential investors when confronted with an overwhelming array of funds.
Prior to this regulatory intervention, the multitude of available funds often left investors perplexed. To address this, SEBI categorised the mutual fund landscape into 40 segments, allowing each fund house only one offering in each category.
The Rise of Business Cycle Funds
Despite these regulations, fund houses discovered a clever workaround by introducing business cycle funds. Recognising the diverse sectors and themes prevalent in the market, fund houses exploited the sectoral/thematic category, enabling them to launch multiple funds under this umbrella.
One standout in this category is the L&T Business Cycle Fund, now known as the HSBC Business Cycles Fund, with a decade-long track record. However, the landscape has witnessed the emergence of nine other business cycle funds in the last four years, collectively managing assets worth ₹ 21,500 crore as of December 2023.
Decoding Business Cycles
Business cycle funds operate on the premise of economic expansion and contraction. In periods of expansion, the fund focuses on sectors historically thriving during growth phases, while in contractions, it shifts investments to more resilient sectors.
Differentiation and Performance
A comparative analysis with flexi-cap funds and value funds within the same fund houses revealed intriguing insights. Only five out of the ten business cycle funds – HDFC, HSBC, Kotak, Mahindra Manulife, and Quant – demonstrated independent sector calls, showcasing a strategic approach beyond mimicking in-house counterparts.
At the stock level, only one business cycle fund exhibited more than a 50% overlap with its flexi-cap counterpart, indicating distinct stock-picking strategies.
Performance Evaluation
HSBC’s business cycle fund, with a decade-long track record, showed less-than-impressive numbers, outperforming its flexi-cap variant only 12% of the time over a five-year rolling basis. However, it’s crucial to note that the remaining nine funds are relatively new, making a comprehensive performance evaluation premature.
Final Recommendations
Given the limited performance history and untested nature of these funds, investors are advised to tread cautiously. Opting for a diversified equity fund, exemplified by a flexi-cap fund, is recommended for a proven track record and cost-effectiveness amidst the evolving landscape.
