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Is Opportunity fund Milkha Singh of Mutual Funds?

13 Jul

Investors are always on the lookout for good investment ideas, and the market occasionally throws up some that are either sector-specific, like FMCG, or theme-related, like consumption, exports or digitization. These also come up due to structural changes in the economy, and you can tap them even if the broader market is in a rut.

If spotted at the onset, you can make a lot of money, but this is easier said than done. To help zero in on such unique ideas and make the most of emerging trends on a sustained basis, mutual funds have come up with ‘opportunities funds’.

How do these differ from equity funds?

Why should one go for a dedicated opportunities fund when all equity funds are supposed to look for sound investment ideas? The answer—and the difference between the two types of funds—lies in scope.

Traditional equity funds are limited in their mandate, investing mostly in a narrow set of stocks defined by market capitalization or sector. So, some schemes invest within the large-cap universe or from a set of stocks belonging to, say, the banking sector. Their task is to identify the best opportunities here.

Watch out for the right fund

Before you blindly bet on opportunities funds, ask yourself whether it will add value to your portfolio. It’s also important to be aware of the risks involved. The modus operandi of such funds boils down to the fund manager’s stock-picking ability and nose for sniffing out good opportunities.

While a well-managed fund can add significant value over the long run, a poorly managed one could erode your capital. The enhanced flexibility in the investment approach also presents a higher level of risk for the investor. This fluidity often leads to a higher portfolio churn as the fund manager attempts to deliver good returns. A higher turnover means more transaction costs, which eat into returns.

Opportunities funds, on the other hand, are mostly broad-based. Most of the funds in this category are free to pick from across the market, though each scheme may have a tilt towards a particular basket, say, the large and mid-cap segment.

 

Opportunities funds, on the other hand, are mostly broad-based. Most of the funds in this category are free to pick from across the market, though each scheme may have a tilt towards a particular basket, say, the large and mid-cap segment.

 

These funds generally have more flexibility in portfolio construction within an overall broad framework. They are ‘no bias’ funds and can invest wherever opportunities arise. Kotak Opportunities, for instance, moves across market capitalisation and sectors without any bias, but within the broad framework of maintaining an exposure of not less than 60% in the large-cap segment.

These funds generally have more flexibility in portfolio construction within an overall broad framework. They are ‘no bias’ funds and can invest wherever opportunities arise. Kotak Opportunities, for instance, moves across market capitalisation and sectors without any bias, but within the broad framework of maintaining an exposure of not less than 60% in the large-cap segment.

Final word

though these dedicated funds have the required expertise and research capabilities to mine ideas round the clock, you should be choosy while taking your pick. First, understand what the fund is trying to do in terms of its investment focus. This will be explained in its investment objective. Then check the consistency in performance, so that you know if the fund can identify and make good of opportunities continuously.

Also check if the performance is sustained across market cycles. Lastly, make sure the fund is not taking too high a risk to capture emerging ideas and check the scheme’s risk profile through online research portals this one.

Performance

The basket of opportunities-funds”>opportunities funds has around 12 schemes, and as with their differing investment focus, the performance is also a mixed bag. The ones that stand out include Reliance Equity Opportunities, UTI Opportunities, Mirae Asset India Opportunities and L&T India Special Situations (erstwhile Fidelity, which have done well across time frames.

However, some like Birla Sun-Life Special Situations, HSBC India Opportunities and DWS Investment Opportunities have struggled to deliver good performance.

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Posted by on July 13, 2013 in Uncategorized

 

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