These funds at times invest in companies going through corporate restructuring, such as mergers, demergers, or buybacks.
Amid all its uncertainties, the stock market keeps presenting new investment opportunities that a trained investor can locate.
A few mutual fund houses try to spot these opportunities through their special opportunities or special situation schemes.
Two new fund offers, WhiteOak Special Opportunities Fund and SAMCO Special Opportunities Fund, have opened recently.
"A special opportunities fund targets companies in their early stages of value creation by identifying catalysts that can trigger positive changes," says Umeshkumar Mehta, chief investment officer, SAMCO Mutual Fund.
"These companies may lack the qualitative factors that more established firms possess but are poised for significant growth," Mehta added.
Bet on unique situations
These funds at times invest in companies going through corporate restructuring, such as mergers, demergers, or buybacks.
Some of these special situations may unfold over a quarter or two, while others may be long-term stories, such as a company launching a new product or an innovative technology.
"The purpose of a special opportunities fund is to capitalise on unique opportunities or challenges faced by a company, sector, or economy, which may create a temporary price disruption," says Manuj Jain, associate director, co-head product strategy, WhiteOak Capital Asset Management Company.
Opportunities arise if a transient, easily fixed issue negatively impacts the stock price or if the stock price does not completely reflect a positive development," Jain added.
This investing strategy involves bottom-up stock-picking and going against the flow.
"These schemes are sector and market cap agnostic. The underlying theme necessitates contrarian bets. Hence, the top 10 holdings of special situations funds usually vary significantly from those of flexicap funds," says Jain.
Potential for higher returns
Special situations schemes have the potential to offer high returns.
"Their investment approach allows these funds to invest in sectors and companies poised for significant growth, whose historical performance may not yet be strong," says Mehta.
"These schemes provide investors with the opportunity to generate alpha, outperforming traditional categories, and benchmark indices," adds Mehta.
These funds can generate high returns if a key event materialises.
"The returns depend on an individual stock's recovery after a specific event," says S Sridharan, founder and CEO, Wallet Wealth.
High-risk bet
These are high-risk funds. "Being thematic schemes, they may exhibit higher volatility in the short term. Hence, one should invest with a long-term investment horizon," says Jain.
One of the main risks is the potential delay in the realisation of the expected catalysts.
"This delay can lead to temporary volatility as the market may react to the uncertainty surrounding the timing of these events," says Mehta.
For seasoned investors only
First-time investors should avoid these funds.
"The risks associated with these funds are very high. Failure to pick the right stocks and situations can lead to potential losses. Only investors with high risk tolerance who can stay invested for the long term should invest in them," says Sridharan.
Jain says first-time investors should stick to traditional categories like large-cap, large and mid-cap, and flexi-cap funds.
Mehta suggests allocating up to 5 per cent of the equity portfolio to them.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff.com
