Motilal Oswal Business Cycle Fund NFO review

Motilal Oswal Business Cycle Fund NFO opened for subscription on August 7 and will be available for investors until August 21, 2024.

Broadly speaking, Motilal Oswal Business Cycle Fund will aim to identify and invest in booming sectors, capitalising on the upward momentum. Conversely, during downturns, it will seek to move investments to more resilient sectors that can help protect against losses.

Currently, there are 11 funds in the business cycle category, managing around Rs 28,000 crore of assets as of June 31, 2024.

Motilal Oswal Business Cycle Fund NFO: Where will it invest?

• Business cycle funds have the freedom to diversify their investments across large-, mid-, and small-cap stocks, with the flexibility to invest across sectors.
  
• Similar to other thematic funds, it will invest 80 per cent of its assets in equity and the rest in debt and other assets.
  
• The fund will be managed by Motilal Oswal AMC's chief investment officer (CIO) Niket Shah and Ajay Khandelwal. Shah has over 14 years of experience and collaborates with Khandelwal on five other funds. Khandelwal also has over 14 years of experience and previously worked at Canara Robeco, handling its small-cap fund.

Reality check
Firstly, all equity-oriented funds should adapt to business cycles, as that's what equity investing is about.

Secondly, the historical performance of business cycle funds tells a different picture. This category has trailed its benchmark, the Nifty 500 TRI, by a considerable margin and for most periods based on monthly rolling returns over the last five years.

Thirdly, ten of the 11 business cycle funds were launched only after 2020, providing a limited track record for assessment. Only L&T Business Cycle Fund (now HSBC Business Cycles Fund), the first in this category, was launched in 2014. Since inception, the fund has given an average yearly return of 16.3 per cent, compared to the benchmark's 15 per cent. However, most of this strong performance has happened only recently.

Motilal Oswal Business Cycle Fund: Should you invest?

While the Motilal Oswal Business Cycle Fund may seem attractive due to its investment objective, management by a team of experienced managers, flexibility to invest across market capitalisations and potential exposure to international stocks and IPOs, the performance of its peers has been uninspiring.

Instead, the flexi-cap category, which shares a similar investment universe and style, has outperformed the business cycle funds with a significant margin over the last five years based on five-year monthly rolling returns.

Moreover, many fund houses that offer a flexi-cap fund have an overlap with their business cycle counterparts. The portfolios are 32 to 67 per cent similar as of June 30, 2024. So, investing in a better and more consistent performing fund (flexi-cap) seems like a better alternative.

For those with surplus money to invest, consider increasing your investment in an existing flexi-cap fund to accelerate achieving your financial goals.