Situation based investment

INVESTORS who joined the equity markets in the Covid-19-infused correction in 2020 are witnessing one challenge after the other in their investment journey. The Russia-Ukraine conflict has been the latest trigger for the broader equity markets to correct almost ten per cent. At the same time, the emerging situation led to a sharp rally in the prices of certain commodities like crude oil or metals like Nickel.

Just a few months ago, the automobile industry was under stress due to the shortage of semi-conductors. Before that, when the spread of Covid-19 was at its peak, real estate was under performing and it was evident in the stock prices of realty companies, too.

All these are just a few examples of how changing situations can have a positive or negative effect on specific sectors. Accordingly, it makes sense to take advantage of these conditions. For instance, investing wisdom suggests buying when a particular sector, which is usually cyclical, is under stress.

However, in reality, it is not so simple. After all, how does a retail investor, with limited time and energy at their disposal, figure out which special situation they can take advantage of? Even if someone tries to get to the bottom of the story, by then, the event passes by. In other words, you need foresight and expertise to utilise the investment opportunities arising out of such circumstances. Hence, the best way to go about finding such opportunities is to hand over the reins to a skilled fund manager who can identify the situations in your favour.

Investment options to capture special situations

Within thematic fund universe, several fund houses offer special situation theme based offerings. As per the Securities and Exchange Board of India categorisation of mutual funds, thematic funds are a category of equity mutual funds, wherein at least 80 per cent of the total assets of a fund are invested in a specified theme or sector.

Special situations here could mean events like geo-political or socio-economic events, corporate restructuring, government policy or regulatory changes, or even temporary unique challenges that specific companies or sectors could face.

Essentially, fund managers of these schemes maintain a 360-degrees lookout for opportunities where they believe that the buying price for the stocks of a company is much lower than what the actual value should be. This temporarily depressed value could be on account of any of the reasons highlighted above.

This also makes these funds to have somewhat concentrated portfolios, despite being an open-ended equity scheme. At the same time, these funds try and maintain a diversified portfolio.

How to invest?

An investor before considering investing in such a fund should evaluate the track record of the fund managers, the success of their previous bets as well as the past performance of the fund. This provides a fair idea how the fund manager has been able to capitalise on the opportunities in the past.

Among the offerings available in this space, the Indian Opportunities Fund from ICICI Prudential Mutual Fund ticks all the right boxes. It is being managed by senior fund managers with close to five decades of collective experience. Since its inception, this scheme has given a return of 21.2 per cent compared to 18.7 per cent for its benchmark Nifty 500. Even in two-year, one-year and six-month periods, the scheme has outperformed the benchmark by several percentage points. However, a word of caution is appropriate here—Past returns cannot be a guarantee of future performance.

The best way to invest in this fund is through a systematic investment plan as special situations keep arising in one form or the other. Qualified fund managers can spot such opportunities across different sectors and can buy and sell accordingly. Also, an investor opting for such a fund should stay invested for at least three years and more so that they can benefit from the turnaround story to be played out.

To conclude, turbulence in the equity markets on account of any development can certainly be a cause of worry for investors. However, with solution like special situations fund, investors can turn times of crisis into investment opportunities which have the potential to deliver rich returns in the long run.

The writer is a mutual fund distributor.

TAGS