4 Ways Investors Can Take Advantage of Business Cycles
The economy is never static; it is dynamic and cyclical in nature. So, when you invest in mutual funds or other investments, your returns can vary based on the business cycle.
A business cycle represents the rise and fall in economic activities. It has four phases: expansion, peak, contraction, and slump. This cycle starts from the bottom – also known as a recession – and moves up to the early cycle, followed in turn by the mid-cycle and late-cycle.
Investing according to business cycles helps you understand sector-specific performance during the various phases of the economy. Finding the right opportunities in between these cycles can help you maximize your returns and invest in the most profitable sectors.
Here are some things you must know in this regard:
1. Investing During a Recession
Economic activity falls during a recession. This is the time when profits and commodity prices are at the lowest. Credit is also low, and the Gross Domestic Product (GDP) is on a decline. However, defensive sectors like healthcare may perform well even during a recession. The utility sector may also do well during this time. This can include companies producing electricity, utility items like medicines, toothbrushes, etc. Corporate and government bonds may also outperform stocks at this time. So, you can consider investing in mutual funds that invest in such securities.
2. Investing in the Early Cycle
Stocks perform well in the early cycle, surpassing bonds and cash. This is a time when interest rates are low. Hence, businesses are able to get credit at affordable rates, which helps to stimulate the economy. This is a good time for information technology (IT), finance, real estate, and industrial sectors. One can invest in stocks and commodities in the early cycle. High-yield corporate bonds can also deliver good returns during this cycle.
3. Investing in the Mid Cycle
The performance of the economy picks up in the mid-cycle. The interest rates are also relatively higher at this time. This is often a good season for the IT sector. Moreover, industrial productivity and profits are at their highest during this time. This is historically the longest phase. Stocks perform well, so investing in equity mutual funds via an SIP may be a good decision.
4. Investing in the Late Cycle
Historically, the stock market averages an annual return of 5% or less during the late-cycle. Inflation and interest rates also rise. This can be an ideal time to shift to index mutual funds. Energy and utility stocks also perform well. However, the bond market may offer low returns at this time.
Investing as per business cycles can help you take advantage of the changing economic situations. You can also consider business cycle funds. These are open-ended equity schemes that follow a business cycle investing theme and help in long-term capital appreciation. The Tata Capital Moneyfy App is available for both iOS and android and offers multiple investing options. Download the app today and amp up your investment game!