Mutual funds bet on 'special' opportunities as uncertainties loom

Two launches next week, one in the pipeline

Mutual funds are looking to tap into the special opportunities theme ahead of the results of the general election results and the continued uncertainty on the geo-political and interest rate fronts.

Two fund houses — WhiteOak Capital and Samco — are set to launch special opportunities funds next week. Kotak MF has also filed papers with the regulator to launch a scheme in the same category.

“Though the strategy makes sense at all times, there can be an added advantage right now if the election results lead to higher volatility,” said Umeshkumar Mehta, CIO, Samco Mutual Fund.  

Special opportunities funds are thematic equity schemes, which have complete flexibility across market capitalisation and sectors.

According to MF officials, though they are similar to flexicap funds on paper, the approach is completely different.

While in the case of the flexicap and most other equity schemes, the stock selection is driven by factors such as growth potential and valuations, special opportunities funds primarily focus on unique events and circumstances, both at the industry and stock level.

These special circumstances can include corporate restructuring, government policy or regulatory changes, technology-led disruption, and innovation.

Sharing the example of a sharp plunge in hotel stocks in 2020, Manuj Jain, Co-Head of Product Strategy, WhiteOak Capital AMC said that special opportunities funds can be contrarian to an extent.

"Special opportunities fund would have seen the plunge in hotel stocks following the pandemic as an opportunity. While the market reaction was justified, one could also see hotels with strong management and backing buying out weaker ones," he said.

"The fund makes sense as the second flexicap option. As most flexicap schemes in the industry have large enough overlap with the benchmark, it would be better to add a special opportunities fund in the portfolio from the diversification point of view," he said.

Analysts say that since fund managers have high flexibility in this category, there is a risk of portfolio overlapping with other schemes in the portfolio.

"A high degree of overlap can occur between this investment style and the contrarian investment style. It is possible that different fund managers could interpret this category differently because it lacks a clear definition. Also, it is possible that the underlying fund holdings could be similar to those of a diversified equity fund that already exists," said Jiral Mehta, Senior Research Analyst, FundsIndia.

Mehta added that they would opt for a fund having at least a three-year track record and consistency in investment style.

At present, there are three existing funds in this space after Axis MF changed the name of its scheme to the innovation fund. 

ICICI Prudential India Opportunities Fund is the largest scheme with nearly Rs 18,000 crore assets under management.

The scheme along with Franklin India Opportunity Fund has managed to beat the benchmark in 3-year and 5-year time frames.