A coin is dropped into a piggy bank in this arranged photograph. (Photographer: Ron Antonelli/Bloomberg)

The Mutual Fund Show: How Understanding Business Cycles Can Improve Returns

Money managers typically suggest that mutual fund investors should stay invested in the market for long term as it ensures higher returns. While that’s important, Sunil Subramaniam of Sundaram Mutual Fund said investors should also be aware of business cycles—not sectoral or thematic, but basic economic indicators like demand-supply and capacity utilisation.

“Cyclicality impacts a mutual fund portfolio in several ways. Understanding and thereby navigating business cycles could not only aid investors stem their losses but also optimise returns,” Subramaniam, managing director and chief executive officer at the fund house, said in BloombergQuint’s weekly series The Mutual Fund Show.

He classified phases in stock markets based on two business cycles:

  • A virtuous cycle when capacity utilisation levels are low but slowly picks up due to excess demand. That’s also when corporates have pricing power.
  • A vicious cycle when utilisation levels are high but starts tapering due to slowing demand, among other reasons. During this period, consumers dictate pricing, which in turn impact companies’ earnings.

Subramaniam said three business cycles had occurred in the last 15 years—a five-year virtuous cycle from April 2003 to January 2008, a five-year vicious cycle from January 2008 to October 2013, and again a virtuous cycle that started in October 2013 and is continuing.

These cycles, according to him, alter returns significantly for an active investor.

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During the April 2003-January 2008 virtuous cycle, an active investor could earn a return of 61.6 percent compared with 57.3 percent by a passive investor. Also, during a vicious cycle, active investors could stem their loss to 2.50 percent compared to 4.50 percent suffered by passive investors, Subramaniam said.

“These additional returns were generated by active investors by wisely investing across equity classes while understanding different business cycles.”

Watch the full show here:

Also read: What India’s Top Three Mutual Funds Bought And Sold In April