What Is Special About A Special Opportunities Fund?

Equity mutual funds are of various types and they go beyond the large, small and mid-cap funds. In fact, there is a wide variety of equity funds for investors to choose from depending on their risk appetite and goals. One such type of fund is called the special opportunities fund. 

“Special opportunities funds are the new buzzword for the asset management company (AMC)s wanting to launch another fund but constrained by one category-one AMC-one fund restriction under SEBI’s Mutual Fund Categorization and Rationalization circular (2017). It is classified as a Thematic fund under the said circular,” says Himanshu Pandya, Founder, HP Private Wealth Advisory Services. 

We take a look at what it is and whether you should invest in one. 

The Investment Mandate 

“Generally an opportunity is called special because it has a unique, not very repeatable impact on the earnings, growth outlook, profit margins of the business or sector and ultimately the price,” says Paras Matalia, Fund Manager and Head of Equity Research, SAMCO Mutual Fund. 

The mandate for special opportunity funds is to identify and capitalise on high-potential investment opportunities arising from special situations. 

“These can include policy changes, mergers and acquisitions, industry consolidations, and management changes etc. Imagine the production linked incentive (PLI) scheme boosting India's electronics manufacturing, the global shift towards a China+1 strategy, or a company revitalised by new management. Picture the cement sector benefiting from industry consolidation or real estate changing under RERA,” says Devender Singhal, Fund Manager, Kotak Special Opportunities Fund. 

These are where special opportunities funds navigate and invest in the opportunities they create.

Such funds are not confined by market cap or sector, giving such funds the flexibility to pursue opportunities across large-cap, mid-cap, and small-cap companies. Whether it’s a large-cap undergoing a transformative merger, a mid-cap benefiting from industry consolidation, or a small-cap with new leadership, such funds seek out promising investments. “Fund offers a broad-based investment approach, unlike sectoral funds that focus on a single industry. This diversification makes such funds a strategic addition to any investor’s portfolio, ready to capture growth wherever it may arise,” says Singhal. 

The Element Of Risk 

Equity mutual funds are riskier than debt mutual funds, and certain equity mutual funds are riskier than the others. Of course, like any other investment, the more risks you take the more returns you can potentially earn. 

Special opportunities fall under the very high risk as per risk-o-meter because it will almost always have a very high equity exposure and thus high risk. “The fund employs complex, event-driven strategies that contribute to its volatility, with the potential for notable gains or losses depending on the outcomes of the events it targets,” says Singhal. 

In fact, such funds may behave differently in volatile markets. “Stocks that are going through special opportunities are usually less volatile compared to broader markets. But, there is a caveat here, when the special opportunity does not play out as the market had assumed for any reason or changes, these stocks can witness heightened volatility,” says Matalia. 

Should You Invest? 

This fund is appropriate for investors who are strategically allocating their equity portfolio and seeking a diversification strategy that includes opportunities with higher risk and potential rewards. “It is best suited for those with a long-term investment horizon of over five years, who are capable of enduring periods of high volatility and are comfortable with the complexity of the investments,” says Kotak. 

The adventurous investor may spend time to understand the special opportunities under consideration and take a call. However, this fund may not suit the conventional investor. “The conventional long term investors should avoid such funds with relatively loose mandates. 

Leading mutual fund rating agencies such as Value Research and Morningstar India avoid rating such funds due to their unrestricted mandate,” says Pandya. 

Special opportunities funds thus invest in unique events aiming for high returns but come with very high risk due to concentrated equity exposure. These funds are best for long-term, risk-tolerant investors who understand the complexities involved.