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. These companies may lack the qualitative factors that more established firms possess but are poised for significant growth,” says Umeshkumar Mehta, chief investment officer (CIO), SAMCO Mutual Fund.
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. 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,” says Manuj Jain, associate director, co-head product strategy, WhiteOak Capital Asset Management Company.
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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. These schemes provide investors with the opportunity to generate alpha, outperforming traditional categories, and benchmark indices,” says Mehta.
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 & mid-cap, and flexi-cap funds. Mehta suggests allocating up to 5 per cent of the equity portfolio to them.
First Published: May 24 2024 | 12:03 AM IST
