Is the Aditya Birla Sun Life Business Cycle Fund risky for investors?

The Aditya Birla Sun Life Business Cycle Fund (ABCF) is set to be rolled out today. This is the fifth such scheme to be launched by various fund houses.  It aims to invest in stocks and sectors depending on the prevailing business cycles. As per Value Research data, this is the eighth equity scheme (across active and passive categories) to be launched by the fund house in 2021.

What is the scheme all about?

ABCF is a thematic equity fund. This scheme aims to identify the sectors that are likely to do well when the economy booms. And at the same time, it would identify sectors that may not do well when the economic growth is anemic and avoid those. Plain-vanilla diversified equity schemes also do something similar. But most equity funds first identify companies from a long-term perspective. The fortune of such companies may or may not be in sync with the direction in which the economy is headed at any point, but the fund manager might still hold them, assuming they would do well eventually.

But ABCL will follow a top-down approach. Using various indicators that track the macro economy, it would first identify the sectors that the scheme should invest in and identify stocks within those segments.

What works

ABCL works as an alternative to a sector fund. Unlike a sector fund that invests in just a couple of closely-related sectors, this scheme will spread its allocations. “If investors go through normal sector fund, you have to change the sectors yourself, as you must identify the next big segment that is expected to do well. Here, in this fund, we do that search for you,” says fund manager Vineet Maloo.

An active sector selection works, if your fund manager is quick in spotting opportunities. As per an analysis by Aditya Birla Sun Life Mutual Fund, the average return given by the bottom-three performing sectors between FY12 and FY21 was a loss of 1-45 percent. The average return delivered by the top-performing sectors was as high as 134 percent. That is how much a Business Cycle fund’s fortunes depend on the calls of the fund manager.

What doesn’t

The fund would hold around 50 stocks, give or take a few. But despite its diversification, ABCL is among the riskiest of all diversified equity schemes. Maloo and Nitesh Jain, the scheme’s co-managers, would need to correctly identify the sectors that could do well during rallying markets, or fall the least when markets are bad. Not just that, they would also have to correctly identify the phase the economy and the market are in.

ABCL is the first business cycle fund to get launched; the other business cycle funds aren’t even a year old. Only L&T Business Cycle fund has been around for more than a year. Typically, all actively-managed funds must have a track record to inspire confidence. More so for a Business Cycle fund.

Should you invest?

There are enough existing diversified equity funds that come with a good pedigree. If you are starting out on building your own portfolio, then avoid ABCL as this is not among the first few mutual fund schemes you should invest in. Risk-averse investors should also avoid ABCL, as this is a thematic fund. It comes close to being a sector fund than a plain-vanilla diversified scheme. The new fund offer closes on November 29.