• Maheswaran Hariharan

AssetPlus NFO Review : HDFC Business Cycle Fund

HDFC Mutual Fund House has launched an NFO, which is open for subscription from Nov 11th, 2022, and closes on November 25th, 2022.


Investment Objective: To generate wealth over the long term, suitable for investors with a high-risk appetite comfortable with high volatility in varied periods.


Investment Strategy: The fund focuses on optimizing various Business Cycles, namely, Expansion, Peak, Contraction, and Slump that a stock/company undergoes and aims to generate growth and returns by spotting them in their early growth phases and exiting them when they are peaking through lead indicators, domain expertise and recurring patterns. It tends to avoid companies that are poised to enter a down cycle.


Fund Manager: Rahul Baijal


Benchmark: Nifty 500 TRI


Fund Management Process:

  1. The Fund follows active management, expecting to generate alpha over the long term.

  2. The selection criteria are majorly from Nifty 500.

  3. The portfolio is built through the following process:

  4. Focusing on companies that are likely to benefit from favorable business cycles

  5. Avoiding companies that are expected to enter bad phases or de-growth

  6. A combination of Bottom-up and Top-down approach will be used to select stocks

  7. There will be rotation in various sectors of the market based on valuations and market opportunities.

  8. There is ample spread between large, mid, and small companies.

Opportunity:


India, the modern-day land of opportunities, has been the most eyed market in the world in recent times. Various businesses have thrived and are starting to blossom beautifully. The different phases of business cycles can be optimized to make the most out of them.


Source: IMF

Top Sectors:

  1. Banks and Financial Services: The banking sector has been in a state of discomfort ever since the outbreak of Coronavirus at the end of 2019 with diminishing growth and interest income. But in the last few months, the sector has been uptick owing to cleaner balance sheets and increased loan books coupled with rising consumer demand.

  2. IT Services: Indian IT exports have grown by 17% in the last two decades. The past one year has been challenging owing to the Nasdaq crashing by more than 30%, causing jitters in Indian IT stocks. However, the long-term growth with increased digital adoption in India makes it a favorable bet.

  3. Infrastructure: Huge CapEx spending by the Union government is said to propel Infrastructure and its allied sectors like construction, cement, pipes, transportation, etc., that could be the story of the coming decade.

  4. Auto: This sector is highly volatile and has had multiple peaks and falls, mostly in line with valuations making it an influential component in this business cycle fund

  5. Pharma: This space has been in sync with the generic pricing of the US and faced a considerable rebound in stock prices during 2020 as Covid was raging through with tremendous demand worldwide.

  6. E-commerce: Increased adoption of smartphones with affordable internet has made it easily accessible to food, grocery, and literally anything that can be delivered through an order placed on a mobile application. This could boom in the coming few years!

Based on our analysis, we have observed the following pros and cons


Pros:

  1. Focuses on businesses that are set to boom.

  2. Diversified across all sizes of the market.

  3. Healthy allocation towards significant sectors of the market.

  4. Positive decadal prospects of India’s robust growth.

  5. Aims to move away from beaten-down areas of the market.

Cons:

  1. Higher levels of risk due to multiple rotations of sectors.

  2. Entering and Existing based on business cycles is highly tricky.

  3. More extensive periods of downsides if the overall economy fails to accelerate.

This fund is unique, with a differentiated thematic approach towards investing. This fund category is relatively lesser known when opposed to the traditional large, mid, and small-cap funds. For investors comfortable with the nature and risk of the fund, it is suitable to allocate a minimal amount of their investments in this category as a tool for higher returns than normal ones!


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