Kotak Business Cycle Fund: Will this Theme Ride Your Portfolio Returns Higher?

Sep 12, 2022

Listen to Kotak Business Cycle Fund: Will this Theme Ride Your Portfolio Returns Higher?

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The term 'Business Cycle' refers to the fluctuations of the economy between periods of expansion and contraction measured by various indicators like GDP growth, Index of Industrial Production (IIP), Interest rates, Inflation, and other macroeconomic variables. These business cycles come in phases that can last from a few months to as long as a couple of years.

Expansion:  A sector or an economy is going through a cycle of high growth.

Peak:  The expansion phase reaches its highest level, and the growth stabilizes.

Contraction:  The growth in the sector or the economy starts to decline.

Slump:  The growth hits its lowest point and then stabilizes at that level.

Each of these phases favours growth in different sectors and opens different cyclical opportunities which call for a unique investing style - 'Business cycle-based investing'. Such shifts in business cycles can provide room to identify investment opportunities across sectors/themes/market caps. As an investor, you could aim to stay prepared to maximize your returns by strategically shifting your investments into sectors that may offer the best opportunities during each phase.

The business cycle funds are a good option for investors to invest and benefit from the shifts in business cycles. Such funds follow a concentrated portfolio approach, which means that any positive news from emerging sectors will help boost returns significantly. On the other side, any negative news from these sectors will hurt the returns if not anticipated in advance.

Kotak Mahindra Mutual Fund has launched Kotak Business Cycle Fund, it is an open-ended scheme following business cycles based investing theme. The scheme will invest in securities with a focus on riding business cycles through dynamic allocation.

On the launch of this fund, Mr Nilesh Shah, group president and managing director at Kotak Mahindra Asset Management Company, said, "There are equity stocks across categories, which tend to do better at various stages of the business cycle. These companies managed to perform well across various economic parameters even during challenging times like economic slowdowns. To identify business cycles and opportunities sector-wise, the fund plans to follow a top-down approach to portfolio construction."

Table 1: Details of Kotak Business Cycle Fund

Type An open-ended equity scheme following business cycles based investing theme Category Thematic - Equity Fund
Investment Objective The scheme shall seek to generate long-term capital appreciation by investing predominantly in equity and equity-related securities with a focus on riding business cycles through dynamic allocation between various sectors and stocks at different stages of business cycles in the economy. However, there is no assurance that the objective of the scheme will be realized.
Min. Investment Rs 5,000/- and in multiples of Re 1 thereafter. Additional purchase Rs 1,000/- and in multiples of Re 1 thereafter. Face Value Rs 10/- per unit
SIP/SWP/STP Available
Plans Regular
  • Growth
  • Income Distribution cum Capital Withdrawal (IDCW)
Entry Load Not Applicable Exit Load
  • For redemption/switch out of up to 10% of the initial investment amount (limit) purchased or switched in within 1 year from the date of allotment: Nil.
  • If units redeemed or switched out are in excess of the limit within 1 year from the date of allotment: 1%
  • If units are redeemed or switched out on or after 1 year from the date of allotment: NIL.
Fund Manager Mr Pankaj Tibrewal
Mr Abhishek Bisen
Mr Arjun Khanna
Benchmark Index Nifty 500 Total Return Index
Issue Opens: September 07, 2022 Issue Closes: September 21, 2022
(Source: Scheme Information Document)

The investment strategy for Kotak Business Cycle Fund will be as follows:

Kotak Business Cycle Fund aims to predominantly invest in equity and equity-related securities with a focus on riding business cycles through dynamic allocation between various sectors and stocks at different stages of business cycles in the economy.

The investment strategy is to follow the top-down approach of portfolio construction to identify stages of the business cycle, and sector opportunities and subsequently use a bottom-up approach to identify strong companies within those sectors. The portfolio is therefore likely to be focused on a few selected sectors which are likely to do well in a particular business cycle. Subsequently, for identifying companies within those sectors, the portfolio construction will be based on bottom-up stock picking using the Business, Management and Valuation (BMV) model.

The Fund Manager will evaluate the business environment that a company operates in, the capability of the management to execute and scale up the business and the valuation of the company based on fundamentals like discounted cash flows and PE ratios, etc. The scheme endeavours to follow the business cycle approach to investing by identifying such economic trends and investing in the sectors and stocks that are likely to outperform at any given stage of the business cycle in the economy.

Kotak Business Cycle Fund: Will this Theme Ride Your Portfolio Returns Higher?
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The fund manager will consider various economic parameters (like corporate profit growth trend, GDP growth, Current Account Deficit, fiscal deficit, interest rates, inflation etc.), investment indicators (like investment in Capex, capacity utilization, credit growth, etc.), business and consumer sentiment which is leading economic indicators (purchasing manager index, business confidence index, sales of various consumer discretionary products, etc.) to decide on the expansion or contraction phase in addition to other parameters.

The focus would be on stocks driven by long-term fundamentals. However, short-term opportunities would also be seized, provided underlying values support these opportunities. The scheme may also invest in listed/unlisted and/or rated/unrated debt or money market securities, provided the investments are within the limits indicated in the asset allocation pattern and SEBI (MF) Regulations.

Under normal circumstances, the asset allocation will be as under:

Table 2: Asset Allocation for Kotak Business Cycle Fund

Instruments Indicative Allocation (% of net assets) Risk Profile
Minimum Maximum High/Medium/Low
Equity and Equity Related Securities selected on the basis of the business cycle* 80 100 Very High
Other Equity and Equity Related Securities of companies 0 20 Very High
Debt and Money Market Securities# 0 20 Low to Medium
Units of REITs & InvITs 0 10 Very High
* The scheme may invest up to a maximum of 30% in units of overseas Mutual Funds schemes / ETFs with similar investment objectives or strategy / Foreign securities having a business cycle theme.
#Debt instruments shall be deemed to include securitised debts (excluding foreign securitised debt) and investment in securitised debts may be up to 20% of the net assets of the scheme. This will also include margin money for derivative transactions.
#Money Market instruments include commercial papers, commercial bills, treasury bills, Government securities having an unexpired maturity of up to one year, call or notice money, certificate of deposit, usance bills, and any other like instruments as specified by the Reserve Bank of India from time to time;
(Source: Scheme Information Document)

Who will manage Kotak Business Cycle Fund?

The designated fund managers for this scheme will be Mr Pankaj Tibrewal for equity investments, Mr Abhishek Bisen, for debt investments and Mr Arjun Khanna for investments in foreign securities.

Mr Pankaj Tibrewal is a graduate of Commerce from St. Xavier's College Kolkata and holds a Master's degree in Finance from Manchester. He has more than 18 years of experience in the fund management area. Prior to joining Kotak AMC, he was in the fund management team of Principal PNB Asset Management Private Ltd.

At Kotak Mutual Fund, Mr Tibrewal currently manages, Kotak Small Cap Fund, Kotak Emerging Equity Fund and Kotak Equity Hybrid Fund.

Mr Abhishek Bisen holds BA Management and MBA Finance degrees. Prior to joining Kotak AMC, he was working with Securities Trading Corporation of India Ltd where he was looking at Sales & Trading of Fixed Income Products apart from doing Portfolio Advisory. His earlier assignments also include 2 years of merchant banking experience with a leading merchant banking firm.

At Kotak Mutual Fund, Mr Bisen currently manages, Kotak Bond Fund, Kotak Gilt fund, Kotak Debt Hybrid Fund, Kotak Gold Fund, Kotak Gold ETF, Kotak Equity Savings Fund, Kotak Equity Hybrid Fund, Kotak Balanced Advantage Fund, Kotak NASDAQ 100 Fund of Fund, Kotak Nifty 50 Index Fund and Kotak Multicap Fund


Mr Arjun Khanna is a CFA, FRM and has completed MMS (Finance) from Jamnalal Bajaj Institute of Management Studies, Mumbai and a B.E (Electronics). He has over 14 years of experience out of which 13 years have been with Mutual Funds in Equity Research. Prior to joining Kotak Mahindra Mutual Fund, he was with Principal Mutual Funds and Citibank N.A. in his earlier stint.

At Kotak Mutual Fund, Mr Khanna currently manages, Kotak Global Emerging Market Fund, Kotak NASDAQ 100 Fund of Fund, Kotak International REIT FOF, Kotak Global Innovation, Kotak Infrastructure & Economic Reform Fund, Kotak Blue-chip Fund, Kotak Equity Hybrid Fund, Kotak Emerging Equity Fund, Kotak Equity Savings Fund, Kotak Small Cap Fund, Kotak Flexicap Fund and Kotak Equity Opportunities Fund.

Fund Outlook - Kotak Business Cycle Fund

Kotak Business Cycle Fund is a theme-based fund that will use a combination of indicators across the domestic and global economy to identify the current phase of the business cycle. The scheme endeavours to identify sectors and high-quality businesses within them. The scheme will dynamically rotate its portfolio in different sectors that can benefit from the prevailing business cycle of the economy. A business cycle is defined in terms of periods of expansion and contraction.

During the late-cycle or contraction phase of 2012-13 where domestic growth was slowing down due to a tapper tantrum, sectors such as IT, Pharma & FMCG performed well. During the recent recovery cycle of 2022 post-pandemic, sectors such as Energy, Metals, Capital Goods etc. have performed well. It may be noted here that business cycle transitions are generally gradual and have many overlapping periods. Thus, the fund may be reasonably diversified across various industries and/or sectors by investing in stocks that are best levered to the stage of the business cycle and transition period.

However do note that changes in business cycles can be sharp and sometimes short-lived, so the fund manager should be able to navigate through short-term volatility while also staying focused on the overall business cycle view. Being a thematic fund, this scheme will focus on investing in opportunities arising out of various stages of business cycles. This could limit the capability of the fund with a concentrated exposure towards a few sectors, thus making it a risky proposition.

In addition, the persistent repercussions of the Russia-Ukraine conflict, spiralling inflation and the RBI's recent announcement to hike policy rates again by 50 basis points to curb demand and control inflation may cause a significant risk to economic growth. The margin of safety appears to be narrow, and the clear direction for the equity market from the current elevated levels is unknown. These factors, among many others, may affect the scheme's performance and the scheme may face intensified volatility in the near term.

Kotak Business Cycle Fund is suitable only for investors having a high-risk appetite and a long-term investment horizon of at least 5-7 years to survive the market volatility. Before taking an investment decision, you should ensure that your investment objective is aligned with the fund.

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Warm Regards,
Mitali Dhoke
Jr. Research Analyst

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