Bandhan Business Cycle Fund: Can It Help You Generate Alpha?

In the recent past, several mutual fund houses have launched business cycle funds with an eye on increasing their Assets Under Management (AUM) amid upbeat sentiments in a bull market and growing Indian economy.

India is perceived to be a “bright spot” in the global economy and is expected to lead the next decade of economic growth. At present it is the fifth largest economy (in nominal GDP terms) and, with favourable demographics, strong private consumption, plus public investments, it is estimated to be the third largest by 2027 according to the International Monetary Fund (IMF).

Not wanting to miss the opportunities in the expansion phase of the Indian economy as well as other phases, Bandhan Mutual Fund (formerly known as IDFC Mutual Fund) also has launched the Bandhan Business Cycle Fund. It is an open-ended equity scheme following a business cycle-based investing theme.

During the NFO period, the Scheme is open for subscription from September 10, 2024, to September 24, 2024. Thereafter the scheme re-opens for subscription on October 1, 2024.

Around 80% to 100% of the Scheme's total assets will be invested in equity & equity-related instruments selected based on the business cycle.

The business cycle refers to the natural rise and fall of economic growth that occurs over time. It typically includes four phases of the economic cycle: Expansion (rising economic activity), Peak (maximum growth), Contraction (declining growth), and Slump (the lowest point of the cycle).

(Image source: https://bandhanmutual.com)

Each phase affects different sectors of the economy in unique ways -- some sectors thrive while others may lag.

Understanding business cycles allows for targeted investments in sectors poised to benefit from current economic conditions. So, there are sector dynamics in play, such as sector-specific drivers like demand, supply, and profitability, combined with a bottom-up approach to stock selection.

For example, financials and real estate may perform well during the expansion phase, while defensives, consumer staples, pharma, and utilities may continue to thrive during the contraction phase of the economy.

Business cycle investing also takes cognisance of interest rates in the economy, inflation, and political stability apart from economic growth.

Moreover, market sentiment, valuations, and capital flows are monitored carefully to stay ahead of the market trends.

As an investor, you can leverage these cycles to identify opportunities and manage risks effectively.

Other than domestic equities, Bandhan Business Cycle Fund also has the mandate to invest up to 20% of its total assets in equity and equity-related overseas securities subject to a maximum of USD 30 million.

This limit will be applicable for a period of six months from the date of closure of NFO, subject to the overall limit of fund house up to a maximum of USD 1 billion and within the overall industry limit of USD 7 billion or such limits as may be prescribed by SEBI from time to time. The Scheme, therefore, may or may not be able to utilise the limit of USD 1 billion due to the USD 7 billion limit being exhausted by other mutual funds.

Further, the Scheme can make investments in overseas Exchange Traded Funds (ETFs) subject to a maximum of USD 300 million per mutual fund, within the overall industry limit of USD 1 billion.

Bandhan Business Cycle Fund may also engage in securities lending -- up to 20% of the total assets with maximum single counterparty exposure restricted to 5% of the total assets.

The Scheme's exposure to derivatives other than for hedging purposes will be up to 50% of the total equity assets.

The Scheme may engage in short selling of securities in accordance with the guidelines/regulations issued by SEBI. Short sale of securities means selling securities without owning them. Engaging in short sale of securities is subject to risks related to fluctuations in market price, and settlement/ liquidity risks.

Up to 20% of the total assets of the Scheme will be invested in Debt Securities and Money Market Instruments (including Government securities and securitised debt). Up to 40% of the total assets of the Scheme shall be invested in securitised debt.

Money Market instruments include commercial papers, commercial bills, Tri- party repos, Treasury bills (T-bills), Government securities (G-secs) having residual maturity of up to one year, call or notice money, certificate of deposit, usance bills, and any other like instruments as specified by the RBI from time to time.

Up to 10% of the total assets of the Scheme will be invested in Units issued by Real Estate Investment Trusts (REITs) & Infrastructure Investment Trusts (InvITs).

The cumulative gross exposure through equity and equity-related instruments, debt and money market instruments, derivative, repo transactions in corporate debt securities, REITs, InvITs, and other permitted securities/assets and such other securities/assets as may be permitted by the Board from time to time should not exceed 100% of the net assets of the Scheme.

Bandhan Business Cycle Fund will not invest in the following:

• Credit Default Swaps (CDS)

• Debt instruments having Structured Obligations (SOs)/Credit Enhancements (CEs)

• Debt instruments with special features (viz. AT1 and AT2 bonds)

• Commodity derivatives

• Debt derivative instruments

• Foreign securitised debt

What Is the Investment Objective?

The scheme seeks to generate long-term capital appreciation by investing predominantly in equity and equity-related instruments with a focus on riding business cycles through dynamic allocation between various sectors and stocks at different stages of business cycles in the economy.

Disclaimer: There is no assurance or guarantee that the scheme's objectives will be realised.

What Is the Investment Strategy?

Being an open-ended thematic scheme, Bandhan Business Cycle Fund will invest predominantly in equity and equity-related securities with dynamic allocation between sectors and stocks based on various stages of the business cycles. It will be actively managed and flexible, allowing investments across market caps and sectors, with a focus on high-quality companies.

The business cycle represents fluctuations in economic activity. It represents the crests and troughs of an economy. The scheme will look to invest in the different stages of a business cycle namely - expansion, peak, contraction and slump. Depending on the phase of the cycle, the scheme will seek to invest in either historically booming or more resilient stocks.

The Scheme will identify sectors based on the business cycle and aim to select stocks based on various financial parameters. It will keep evaluating the portfolio based on continuous assessment of the macroeconomic environment and subsequent investment approach.

A top-down approach will be followed based on factors such as:

• Macroeconomic indicators (global economic growth, monetary policy, liquidity, geopolitics),

• domestic economic outlook (monetary and fiscal policies, credit cycles, rural and urban economies),

• Government reforms (production incentives, digitization, tax policies)

• Private consumption, and

• Capital expenditure trends

The fund will take a focused approach on select sectors to capture the potential opportunities based on the cycle. The business cycle would be assessed based on parameters such as economic cycle, market cycle, as well as sector cycle which would influence the sector and stock selection. The fund manager would evaluate the economic cycle based on the interest rates, money supply, credit growth, exchange rate, economic activity, etc.

The market cycle will be guided by the different phases of the economy and the business fundamentals (earnings growth and valuation multiples). Based on the phases of the economy, sectors typically tend to rotate as the overall economy shifts from one stage of the business cycle to the next.

As different sectors assume leadership in different economic phases, the fund would intend to allocate through dynamic allocation between various sectors and stocks. The fund manager will favour companies that are most attractively valued relative to their quality of management, business model & financial metrics.

The fund will have the flexibility to invest in a broad range of companies with an objective to maximise the returns, at the same time trying to minimize the risk by reasonable diversification.

For trading in derivatives, the Scheme may use instruments such as stock/index Futures & Options (F&Os), or such other derivative instruments as may be introduced from time to time and in the manner permitted by SEBI/RBI from time to time. Derivatives provide unique flexibility to the Scheme to hedge part of its portfolio.

Though every endeavour will be made to achieve the objective of the Scheme, the AMC/Sponsors/ Trustee does not guarantee that the investment objective of the Scheme will be achieved. No guaranteed returns are being offered under the Scheme.

The performance of the Scheme will be benchmarked against the Nifty 500 Total Return Index (TRI). A broad market index is selected, as it accounts for a large section of the Indian market capitalization and covers major sectors. The Nifty 500 TRI forms part of the Tier I benchmark of the AMFI-approved list for the thematic fund (Business Cycle Theme).

Here's what Mr Vishal Kapoor, the CEO of Bandha Asset Management Company (AMC), said about the fund launch:

"This fund taps into economic cycles, equity trends, and sector dynamics, offering investors a 360-degree approach. It is designed to diversify portfolios and optimize returns while managing risks by adjusting sector allocations based on market conditions."

Who Will Manage Bandhan Business Cycle Fund?

The equity portion of Bandhan Business Cycle Fund will be co-managed by Mr Vishal Biraia and Ms Ritika Behera (equity portion & Overseas portion).

Mr Harshal Joshi and Mr Gaurav Satra will manage the debt portion and overseas portion, respectively.

Mr Vishal Biraia has over 20 years of experience in the capital market. He joined Bandhan AMC Limited in June 2023 in fund management. Before that, he was associated with Max Life Insurance (June 2021 to May 2023) and Aviva Life Insurance (July 2018 - November 2021) as a Research Analyst and Assistant Fund Manager. Prior to that, Vishal was associated with Antique Stock Broking (January 2015 to July 2018), with primary responsibility of research and marketing Indian equities to FIIs and previously with Batlivala & Karani Securities (June 2007 to July 2014) as a Research Analyst.

Vishal holds a bachelor's degree in engineering (B.E) and has completed CFA (level 2). At Bandhan Mutual Fund the other schemes he manages are Bandhan Balanced Advantage Fund, Bandhan Infrastructure Fund, and Bandhan Retirement Fund.

Ms Ritika Behera has over 14 years of experience in the capital markets. She joined Bandhan AMC Limited in August 2023 as Vice President - Equities. Before Bandhan AMC Limited, she was associated with Ocean Dial Asset Management from April 2021 to July 2023 as an Analyst. Earlier to this, she was associated with Elara Securities Pvt. Ltd. from January 2017 to March 2021 and with Batlivala & Karani Securities Pvt. Ltd. from August 2013 to January 2017.

At Bandhan Mutual Fund she manages the Bandhan US Equity Fund of Fund and all other schemes having provision for investment in overseas securities in the equity segment. Ritika is a commerce graduate (B.Com) and an MBA (Finance).

Mr Harshal Joshi has experience spanning over 14 years in Mutual Funds. He has been associated with Bandhan AMC since December 2008 with the Fixed Income Investment team. Before that, he was associated with ICAP India Pvt. Ltd. (2006 to 2007). At various debt portions of Bandhan Equity Savings Fund and several other debt mutual fund schemes. Harshal holds a Post Graduate Diploma in Business Management (PGDBM).

Mr Gaurav Satra has a total work experience of more than 7.5 years. He is a commerce graduate (B.Com) and a Chartered Accountant (CA). Gaurav joined the equity fund management team of Bandhan AMC in June 2022 and was designated as an Equity Dealer. Currently, he is Assistant Manager - Equity. Before joining Bandhan AMC he was associated with various consultancy firms as a CA from December 2016 to May 2022. At Bandhan Mutual Fund he manages the Bandhan US Equity Fund of Fund and all other schemes having provisions for investment in overseas securities in the equity segment.

How much is the Minimum Investment in Bandhan Business Cycle Fund?

During the NFO period and ongoing basis, the minimum investment in the Scheme is Rs 1,000/- and in multiples of Re. 1/- thereafter.

For the Systematic Investment Plan (SIP), the minimum SIP amount is Rs 100/- and in multiples of Re. 1 thereafter (Minimum 6 instalments).

In case you considering the Systematic Transfer Plan (STP), the minimum amount is Rs 500/- in multiples of Re. 1 thereafter.

The Scheme offers both, the Direct and Regular Plan and only the Growth Option for investment. This option is suitable if you are not seeking Income Distribution cum Capital Withdrawal (IDCW).

Who Should Consider Investing in Bandhan Business Cycle Fund?

This Scheme is suitable for investors looking at wealth creation over the long term by exploring the 'business cycle' theme. As explained above, business cycle investing involves adopting an investment strategy based on the current phase of the economy. Each phase of the economic lifecycle unlocks unique opportunities.

Table: Sectors That Usually Benefit in Various Phases of Economic Lifecycle

Purely an indication and for illustration purposes only.
The sectors mentioned are for illustrative purposes only. The above analysis should not be treated as any recommendation.
Past performance may or may not be sustained in the future and does not guarantee any future returns.
(Source: Bandhan Mutual Fund's Investor Presentation)

Given that the fund holds the mandate to invest across sectors and market cap segments, the fund shall provide diversification while aiming to generate alpha.

However, Bandhan Business Cycle Fund is suited for investors with a very high-risk appetite in the pursuit of higher return potential and a longer investment horizon of 7-8 years or more. Those looking to enhance their satellite portion of the equity portfolio for potential alpha generation may consider this Scheme.

It should be noted that the run-up of the Indian equity market, has pushed the Nifty 500 Index Price-to-Equity (P/E) and Price-to-Book Value (P/Bv) ratio to around 27x and 4x (as of September 13, 2024), respectively, which is above the 1-year and 2-year average. The current P/E ratio is below the 5-year average, but the P/B ratio is slightly above the long 5-year average.

The fortune of the Scheme will be closely linked to how astutely investment opportunities are identified in the respective phases of the economic lifecycle and how agile the fund management teams are as regards sector rotation at the turn of the respective phase.

To know more about the Bandhan Business Cycle Fund read the Scheme Information Document and Key Information Memorandum.

Make an informed investment decision and be a thoughtful investor.

Happy Investing!